Seeking a fairly apportioned tax base

In a world of increasing reliance on the sales force

​To make a case for the use of an alternative apportionment formula, a taxpayer must rely on a facts-based argument that shows the relationship of the factor to its income. In this article, authors Alex Meleney and Frederick H. Thomas, of Deloitte Tax LLP, discuss the standards that courts have used in determining whether relief is warranted.

Alternative apportionment

Although the rationale is clear, whether pursued on constitutional grounds or under state ‘‘alternative apportionment’’ statutes, determining the circumstances under which a taxpayer or a state can compel a deviation from the state’s standard apportionment formula has proved an uncertain exercise.

Most recent cases have tended to focus on whether the sales factor fairly represents the taxpayer’s activity in the state. This emphasis on the sales factor is not surprising, as a growing number of states move to a more heavily weighted or even a single-sales factor apportionment formula for corporate income tax purposes. As such formulas put even more emphasis on sales as a measure of the income earned in a state and either reduce or eliminate the effect of the property and payroll factors, it becomes increasingly important to explore the circumstances under which negatively impacted multistate corporate taxpayers may be entitled to utilize an alternative formula to more fairly reflect income earned in the state.

In this article, the authors examine the standards that courts have used to determine whether a multistate corporate taxpayer is entitled to deviate from the standard apportionment formula either under the US Constitution or under state statute. The goal is to identify some of the factors that courts have considered and found persuasive in concluding that relief is warranted. In a final section, the authors consider how alternative apportionment might be applied in the context of a single-sales factor apportionment formula.

By Alex Meleney and Fred Thomas of Deloitte Tax LLP, originally published in Bloomberg BNA "Tax Management Weekly State Tax Report" in December 2010

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