Risks of Apportionment

February 21, 2020

While apportionment issues present challenges they also present opportunities. Proper planning can help to manage your overall tax liabilities, and knowledge of these issues can help mitigate potential exposures and combat aggressive taxing authorities on audit.


Gary Bingel:

The major downfall or major risk of apportionment is that if you apportion your income incorrectly, you can end up paying much more tax than you should be paying. So it's really a monetary risk. Specifically, a major downfall would be if you end up paying on more than 100% of your income. You may end up using a broad brush approach and then having a state come in and tell you your apportionment methodology is incorrect and facing a huge assessment. In some instances, you may be able to go back and recoup some of that money from other states by filing refund claims, but that can be costly and take a lot of time. Also, depending upon how long the initial audit talk, you may be out of statute may not be able to get a refund in those states. Further, if you don't know the differences in state methodologies that some states may use cost of performance and other states may use market sourcing, or states may both use cost of performance, but different types of cost of performance.

This can lead to a lack of understanding and a lot of confusion in the area, which again can lead to you misapplying the rules and overpaying your taxes. Under the cost of performance method, there was a lot of record keeping that was required where your costs were incurred, what type of cost to include. Under the market sourcing approach, it may be equally confusing and that you may need to determine where your market is or where your ultimate market is or your customer's customers market. Often you don't have that type of information readily available or at hand at all, so you may find yourself having to gather more information from your customers themselves. Whereas previously you only needed to look at information that was more readily available like where your property and payroll was. Often, if you lack some of these records, you may find yourself facing an initial assessment from the state. And one of the issues with that is that then the burden of proof falls on you to prove that assessment is incorrect because such assessments are generally deemed to be correct until proven otherwise in many states.

About Gary Bingel

Gary Bingel, Partner-in-Charge of the National State and Local Tax Group, with expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

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