Definition
Apportionment is the method a state uses to decide what share of a multistate business's income it may tax. The formula compares the business's activity in the state with its activity everywhere, using factors such as sales, property and payroll. States differ on which factors they use and how they weight them, and many weight sales heavily or use sales alone. The model act many states drew from is the Uniform Division of Income for Tax Purposes Act. Separate sourcing rules decide where a sale is located, and these differ for goods, services and intangibles.
Why it matters in an audit or review
Apportionment sets the blended state rate used in the tax provision, and shifts in the sales mix change deferred taxes. Auditors test the factor data against the general ledger, review sourcing assumptions, and consider uncertain positions where a state could source differently.
Example
Illustrative: a company has $10,000,000 of apportionable income and $12,000,000 of total sales, of which $3,000,000 is sourced to State A. The sales factor is $3,000,000 / $12,000,000 = 25%. Income apportioned to State A is $2,500,000. At a hypothetical 6% rate, State A tax is $150,000.
Common mistakes
- Using last year's factors after a change in where customers are located.
- Applying one state's sourcing rule to every state.
Sources
- Multistate Tax Commission, Article IV, Uniform Division of Income for Tax Purposes Act: https://www.mtc.gov/uniformity/article-iv/
- FASB ASC 740-10, Income Taxes (measurement of state taxes and uncertain positions)
- Each state's revenue department rules
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error