Apportionment Formulas

Transcription

1 Apportionment Formulas When a corporation s business activities extend into more than one state, such that the corporation is or could be taxed by more than one state, the question arises as to how to determine the portion of the corporation s income attributable to each state. When, as is often the case, a corporation consists of separate but interdependent departments and divisions that are integrated vertically or horizontally, it is generally not possible to assign the corporation s income precisely among the several states in which it does business. Because the results obtained by using a separate accounting method for each business unit are often arbitrary, almost all the states use allocation and apportionment to determine the portion of a corporation s income that is attributable to a particular state. Allocation Allocation generally refers to the assignment of nonbusiness income to a particular state. Nonbusiness income arises from activities outside a corporation s regular course of business. For example, rental income received by a manufacturing corporation for a piece of real property that is located outside the state in which the corporation carries on its manufacturing activities and that is not related to those manufacturing activities. Nonbusiness income is usually allocated to the state in which the property giving rise to the income is located, or in the case of income from intangible property, to the state in which the corporation has its commercial domicile. (See the section entitled Allocation of Nonbusiness Income in this part for further details regarding the allocation of nonbusiness income.) Apportionment A corporation that is taxable in more than one state has the constitutional right to have its income fairly apportioned among the taxing states. [Complete Auto Transit v. Brady, 430 U.S. 274 (1977)] A taxpayer apportions its income by computing the percentage of its business income that is taxable in each nexus state using the formulas provided by those states. To determine a state s apportionment percentage, a ratio is established for each of the factors included in the state s formula. Each ratio is calculated by comparing the level of a specific business activity within a state to the total corporate activity of that type. The ratios are then summed, averaged, and appropriately weighted (if required) to determine the corporation s apportionment percentage for each state. Apportionment does not necessarily provide a uniform division of a corporation s income among the nexus states (i.e., a corporation s apportionment percentages may not sum to 100 percent) because each state is free to choose the type and number of factors it will use as indicative of the amount of business activity conducted within its borders. I-489

2 Moreover, each state makes its own rules for computing the factors included in its apportionment formula. The lack of uniformity can result in either double taxation or nowhere income. In 1957, a group of state tax officials promulgated the Uniform Division of Income for Tax Purposes Act (UDITPA), which is a model law for apportioning the income of a corporation that is taxable in two or more states. UDITPA provides for the use of a threefactor formula that includes a sales factor, property factor, and payroll factor. However, in Moorman Manufacturing Co. v. Bair [437 U.S. 267 (1978)], the Supreme Court ruled that a three-factor formula is not constitutionally required, and that Iowa could use a sales-only apportionment formula. Consistent with its prior rulings, the Court stated that a state s choice of apportionment formulas generally will be upheld unless a taxpayer can prove by clear and cogent evidence that the formula attributes income to the state that is out of all appropriate proportion to the business transacted by the taxpayer in that state. At present, about ten states use a three-factor apportionment formula that equally weights sales, property, and payroll. Most states use a modified three-factor formula, under which the sales factor is assigned more weight than the property or payroll factors. About twenty states double weight the sales factor (i.e., 50 percent sales, 25 percent property, and 25 percent payroll). An increasing number of states require the use of an apportionment formula that includes only a sales factor. These states include Illinois, Iowa, Nebraska, Texas, and Oregon (effective July 1, 2005). Georgia, New York and Wisconsin have enacted legislation to phase-in a sales-only formula between 2006 and 2008, and Minnesota has enacted legislation to phase-in a sales-only formula between 2007 and Michigan has adopted a formula weighted in favor of sales, and Ohio and Pennsylvania have adopted a formula weighted in favor of sales. The political appeal of an apportionment formula that weights the sales factor more heavily than the property and payroll factors is that it tends to reduce the tax liabilities of in-state corporations, while potentially increasing the tax liabilities of out-of-state corporations. Specifically, placing more weight on the sales factor tends to pull a larger percentage of an out-of-state corporation s income within the taxing jurisdiction of the state because the corporation s major activity within the state sales of its product is weighted more heavily than its payroll and property activities. For corporations that are based in the state, however, placing more weight on the sales factor provides tax relief because those corporations generally own significantly more property and incur more payroll costs (factors that are given relatively less weight in the apportionment formula) within the state than do out-of-state corporations. Example. XYZ Corporation realized $1.5 million of taxable income from the sales of its products in State A and State B. XYZ is taxable by both states, and its gross sales, payroll, and property are allocated between the states as follows: State A State B Total Gross sales $2,000,000 $2,000,000 $4,000,000 Payroll 1,500, ,500,000 Property 2,500, ,500,000 Income tax rate 10% 5% I-490

3 If A uses an equally weighted sales factor in its three-factor apportionment formula, $1,249,500 of XYZ s taxable income is apportioned to A. $2,000,000 $4,000,000 = 50% $1,500,000 $1,500,000 = 100% $2,500,000 / $2,500,000 = 100% Sum of apportionment factors 250% Average / 3 Apportionment factor for A 83.3% Taxable income $1,500,000 Taxable income apportioned to A $1,249,500 Tax rate 10% Tax due to A $ 124,950 If, instead, A uses a double-weighted sales factor in its three-factor apportionment formula, only $1,125,000 of XYZ s taxable income is apportioned to A. $2,000,000 / $4,000,000 = 50%; 50% 2 = 100% $1,500,000 / $1,500,000 = 100% = 100% $2,500,000 / $2,500,000 = 100% = 100% Sum of apportionment factors 300% Average / 4 Apportionment to A 75% Taxable income $1,500,000 Taxable income apportioned to A $1,125,000 Tax rate 10% Tax due to A $ 112,500 Because A imposes a higher rate of tax, it is to XYZ s advantage to have as little taxable income as possible subject to tax in that state. If the apportionment formula adopted by State A double weights the sales factor, XYZ will save $12,450 of state income tax, which represents a 10 percent savings. Example. Assume the same facts as those in the previous example. If State B adopts a sales-only apportionment formula, 50 percent of XYZ s income will be taxable by State B even though State A will tax 75 or 83.3 percent of XYZ s income (depending on the weighting of the sales factor). $2,000,000 / $4,000,000 = 50% Taxable income $1,500,000 Apportioned to B $ 750,000 If a state uses a three-factor apportionment formula and one of the factors is not present (e.g., a corporation has no payroll), the computation of the apportionment percentage is adjusted accordingly. For example, if a state uses an equally weighted three-factor formula and the payroll factor is omitted, the apportionment percentage is determined by dividing the sum of the property and sales factors by two [e.g., Rentco Trailer Corp. v. Director of Revenue, No RI (Mo. Admin. Hearing Comm., July 31, 1998)]. Right to Apportion Not all corporations are entitled to apportion their income. The requirements for establishing the right to apportion income vary from state to state, but generally entail carrying on business in another state, maintaining a regular place of business in another state or being taxable in another state. Some states take the restrictive position that permits apportionment only if the corporation is actually filing returns and paying tax in another state. I-491

4 For example, in River Systems, Inc. v. Division of Taxation [No (N.J. T.C. Dec. 21, 2001)], the New Jersey Tax Court ruled that the income of a New Jersey corporation is 100 percent taxable in New Jersey because the taxpayer s use of telemarketers in New York did not satisfy the state s requirement that, in order to apportion its income, a taxpayer must maintain a regular place of business outside New Jersey. Likewise, in TSI Holding Co. v. Director of Revenue [No. SC85179, SC85180, and SC85181 (Mo. Sup. Ct., Nov. 4, 2003)], a case dealing with the Missouri franchise tax, the Missouri Supreme Court ruled that three related Missouri investment holding companies were not entitled to apportion their income because they did business solely in Missouri. The corporations did not do business in any other state, did not have offices in any other state, and did not file franchise tax returns in any other state. Another example is Tech-Etch, Inc. v. Commissioner of Revenue [No. C (Mass. App. Tax Bd., June 3, 2005)], in which the Massachusetts Appellate Tax Board ruled that a Massachusetts manufacturer was not entitled to apportion its income in connection with sales of goods shipped to customers located in foreign countries, because the taxpayer failed to establish that it was taxable in another state or foreign country. Equitable Relief Provisions The divergent apportionment formulas used by the states, along with different rules for computing the factors in each state s formula, can result in a corporation s being subject to tax on more or less than 100 percent of its income. An equally adverse consequence of apportionment may result when the operations in a state result in a loss. When a corporation as a whole generates a profit, the use of an apportionment formula results in the corporation s incurring an income tax liability in the state in which the loss operation is located, even though no profit is generated in that state. To provide relief in extreme situations, Section 18 of the Uniform Division of Income for Tax Purposes Act (UDITPA) provides that if the allocation and apportionment provisions of UDITPA do not fairly represent the extent of the taxpayer s business activity in a state, the taxpayer may petition for, or the tax administrator may require, with respect to all or any part of the taxpayer s business activity, if reasonable, use of separate accounting, exclusion of any one or more of the factors, inclusion of one or more additional factors, or employment of any other method that will result in an equitable allocation and apportionment of the taxpayer s income. In a similar fashion, California s equivalent of UDITPA Section 18, California Revenue and Taxation Code Section (Equitable Adjustment of Standard Allocation or Apportionment), states: I-492 If the allocation and apportionment provisions of this act do not fairly represent the extent of the taxpayer s business activity in this state, the taxpayer may petition for or the Franchise Tax Board may require, in respect to all or any part of the taxpayer s business activity, if reasonable: (a) Separate accounting; (b) The exclusion of any one or more of the factors; (c) The inclusion of one or more additional factors which will fairly represent the taxpayer s business activity in this state; or (d) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer s income. California Code of Regulations Title 18, Section 25137, states that Section may be invoked only in specific cases where unusual fact situations (which ordinarily will be unique and nonrecurring) produce incongruous results under the apportionment and allocation provisions contained in these regulations.

5 There is a presumption developed by judicial precedent that a state s apportionment provisions are equitable. Thus, the taxpayer must do more than merely demonstrate that there is a substantial inequity in its tax liability under the state s apportionment formula. To receive relief from the state s standard formula, the corporation generally must prove by clear and convincing evidence that the apportionment formula grossly distorts the amount of income actually earned in the state. For the most part, corporations have been unsuccessful in proving that a state s standard apportionment provisions are inequitable. [E.g., Hans Rees Sons, Inc. v. North Carolina, 283 U.S. 123 (1931); Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978); Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983); Unisys Corp. v. Pa. Bd. of Fin. and Rev., 812 A2d 448 (Pa. Sup. Ct. 2002); and Colgate-Palmolive Company, Inc. v. Bower (No. 01 L 50195, Ill. Cir. Ct., Cook Cty., Oct. 15, 2002).] See Home Interiors & Gifts, Inc. v. Strayhorn [No CV (Tex. Ct. of App., July 28, 2005)] for an example of a fact pattern in which a state court ruled that a taxpayer s income was not fairly apportioned. Specialized Industry Formulas A three-factor formula typically is used to apportion the income of manufacturers and mercantile businesses. The accompanying chart reflects the apportionment factors used in apportioning the income of such businesses. Most apportionment statutes, however, also contain special provisions for apportioning the income of multistate businesses in certain industries, such as transportation companies, financial institutions, utilities, insurance companies, and construction companies. Special-apportionment provisions typically use factors that are appropriate to the particular industry. For example, mileage methods are frequently used in apportioning the income of a freight company. (See the section in this part entitled Specialized Industry Formulas for a state-by-state listing of the apportionment formulas that have been adopted for certain specialized industries.) Recent Developments Arizona. Prior to 2007, Arizona uses a double-weighted sales formula. In 2005, Arizona enacted legislation that will give taxpayers the option to use an alternative apportionment formula, under which the sales factor would be weighted 60 percent for tax years beginning in 2007, 70 percent for tax years beginning in 2008, and 80 percent for tax years beginning after The alternative formulas will be available, however, only if one or more corporations make more than $1 billion of new capital investments in the state. [H.B. 2139, May 20, 2005] Arkansas. Effective in 2003, to apportion income for Arkansas tax purposes, a taxpayer must file a tax return in the another state in addition to being subject to a net income tax, franchise tax measured by net income, or other tax measured by income or another measure of business activity in that state. If the state in question has no net income tax, franchise tax measured by net income, or other tax measured by income or another measure of business activity, the taxpayer s activities in the other state must exceed those protected by Public Law No [S.B. 336, April 9, 2003] Georgia. For tax years beginning before 2006, Georgia uses a double-weighted sales formula. In 2005, Georgia enacted legislation to phase in a sales-only formula over a threeyear period. The sales factor will be weighted 80 percent for tax years beginning in 2006, 90 percent for tax years beginning in 2007, and 100 percent for tax years beginning after [H.B. 191, Apr. 6, 2005] I-493

6 Louisiana. For tax years beginning before 2006, Louisianna uses a double-weighted sales formula. For tax years beginning after 2005, a taxpayer whose apportionable income is derived primarily from the business of manufacturing or merchandising will use a salesonly apportionment formula. [H.B. 679, July 1, 2005] Minnesota. For tax years beginning before 2007, Minnesota uses a apportionment formula weighted in favor of sales. In 2005, Minnesota enacted legislation to phase in a sales-only formula over an eight-year period beginning in The sales-only formula will be fully phased in by [H.F. 138, July 14, 2005] New York. For tax years beginning before 2006, New York uses a double-weighted sales formula. In 2005, New York enacted legislation to phase in a sales-only formula over a threeyear period. The sales factor will be weighted 60 percent for tax years beginning in 2006, 80 percent for tax years beginning in 2007, and 100 percent for tax years beginning after [S.B. 3671, Apr. 12, 2005] Oregon. For tax years beginning after June 30, 2005, Oregon adopts a sales-only formula. [S.B. 31, Sept. 2, 2005] Oregon used a double-weighted sales formula for tax years beginning after 1990 and before May 1, 2003, and an formula weighted in favor of sales for tax years beginning on or after May 1, [Ore. Dept. of Rev., Reg ] Rhode Island. Effective for tax years beginning on or after January 1, 2004, manufacturers may elect to apportion income to Rhode Island using a formula that weights the sales factor 40 percent and property and payroll factors each 30 percent. Effective for tax years beginning on or after January 1, 2005, manufacturers may elect to apportion income using a double-weighted sales formula. [H.B. 6174, July 15, 2003] Rhode Island s standard formula is an equally-weighted three factor formula. Utah. For tax years beginning before 2006, Utah uses an equally-weighted three factor formula. For tax years beginning after 2005, a taxpayer may elect to use a double-weighted sales formula in lieu of the equally-weighted formula. A taxpayer making the election will not be allowed to revoke it for five tax years. [H.B. 78, Mar. 18, 2005] Vermont. Effective for tax years beginning on or after January 1, 2006, the sales factor will be double weighted. [H.B. 784, June 7, 2004] Under current law, Vermont uses an equally-weighted three-factor apportionment. Wisconsin. For tax years beginning before 2006, Wisconsin uses a double-weighted sales formula. In 2003, Wisconsin enacted legislation to phase in a sales-only formula. The sales factor will be weighted 60 percent for tax years beginning in 2006, 80 percent for tax years beginning in 2007, and 100 percent for tax years beginning after [S.B. 197, July 31, 2003] State-by-State Summary The following chart is divided into two parts for ease of presentation. The first indicates whether the state follows UDITPA and identifies the factors and their weighting in the states standard apportionment formulas. The second part indicates whether the states allow separate accounting and allow (or require) allocation of specific items when the standard apportionment formula does not fairly represent the extent of the taxpayer s business activity in the state. The second part also identifies whether a factor is eliminated in computing the states apportionment percentages if either the numerator or the denominator of the factor is zero. I-494

7 Apportionment Formulas (Part 1) Legend: X These factors are used in apportioning business income NA Not applicable NR Not reported Generally Used Factors Does State Follow UDITPA? Sales Property Payroll Are the Factors Weighted Equally? Alabama Yes, with minor variations X X X Yes X X X Yes Alaska Yes, modified apportionment formula for oil and gas producers and pipeline companies Arizona Yes X X X No, sales double-weighted Arkansas Yes, double-weighted sales factor X X X No, sales double-weighted after 1994 X X X No, sales double-weighted. However, there is an exception for some extractive and agricultural business activity, saving and loan activity, and banking or financial business activity. For these, all factors are 1 /3. California Yes, however, unlike UDIPTA itself. California applies the apportionment and allocation rules of UDIPTA to financial corporations and utilities. In addition, unlike UDIPTA, California double weighs the sales factor for most taxpayers. California also has special statutory variations from UDIPTA dealing with 1) apportionment of sea and air transportation 2) gain on the sale of a nonbusiness partnership interest, and 3) professional athletic teams. Operating under authority of UDIPTA s section 18, California also has regulatory variations from the standard provision of UDIPTA. (Cal. Code Regs., tit. 18, through Special rules apply to some extractive and agricultural business activity, savings and loan activity, and banks and financial institutions using fractions of 1 /3, 1 /3, and 1 /3 for sales, property, and payroll factors. I-495

8 I-496 Apportionment Formulas (Part 1) (continued) Legend: X These factors are used in apportioning business income NA Not applicable NR Not reported Generally Used Factors Does State Follow UDITPA? Sales Property Payroll Are the Factors Weighted Equally? X Yes, for 2-factor election: sales 1 /2 and property 1 /3, MTC special industry regulations adopted. A corporation may opt to use either the 2-factor formula (sales and property) or 3-factor formula. Colorado Yes, Colorado also allows an optional 2-factor formula (no payroll factor); which also has no throwbacks. X X No, property 25%; payroll 25%; gross receipts 50%, if sector 31, 32, or 33 of NAICS Connecticut No Gross receipts Delaware No X X X Yes X X X Yes Yes, income from sales of tangible personal property is considered to be income from a District source unless the principal place of business of the corporation is located outside the District and the property is delivered from places outside the District for use outside the District. District of Columbia Florida No. However, limited provisions are followed. X X X No, property 25%; payroll 25%; sales 50%. One factor for transportation companies (revenue miles), one factor for insurance companies (direct premiums written) Georgia No X X X No, sales 50%; property 25%; payroll 25% for 2005 and before. Sales 80%; property 10%; payroll 10% for Sales 90%; property 5%; payroll 5% for Sales 100% for Hawaii Yes X X X Yes

9 X X X No, property 25%; payroll 25%; sales 50% Idaho Yes, Idaho version also applies to utilities and financial institutions; in addition, state s version contains a stronger presumption that all income is business income unless proven otherwise. X After 2000, 100% sales. The payroll and property factors remain relevant, however, for purposes of the 80/20 test that is used for determining membership in a unitary business group under IITA 1501(a)(27). Illinois Yes, alternative apportionment provisions are provided for insurance companies, financial organizations, and transportation companies. Indiana Generally consistent with UDITPA X X X No, property 1 /3; payroll 1 /4; sales 1 /2 Iowa No X Sales 100% X X X Yes Kansas Yes, except for one factor apportionment of transportation and telecommunications corporations. Two factor allowed if payroll factor greater than 200% of average property and sales factors combined. X X X No, property 25%; payroll 25%; sales 50% Kentucky Yes, double-weighting of the sales factor and assignment of receipts on a strict designation basis; no throwback or throwout Louisiana No X X X No, sales double-weighted. Effective for income tax periods beginning after 12/31/05 and franchise tax periods beginning after 12/31/05, the Louisiana Headquarters and Growth Act applies. For corporation income tax purposes, this Act provides for an exemption for interest and dividends, a single factor apportionment formula for certain businesses, and the apportionment of profits or losses from sales or exchanges not made in the regular course of business. For corporation franchise tax purposes, this Act provides for a single (cont d) I-497

10 I-498 Apportionment Formulas (Part 1) (continued) Legend: X These factors are used in apportioning business income NA Not applicable NR Not reported Generally Used Factors Does State Follow UDITPA? Sales Property Payroll Are the Factors Weighted Equally? Louisiana (cont d) factor allocation of the franchise tax base for certain businesses. Businesses primarily engaged in manufacturing or merchandising will use a single sales factor for apportionment purposes for both income and franchise taxes. Maine Yes X X X No, sales double-weighted Maryland No X X X No, sales double-weighted Massachusetts No, see 830 CMR X X X No, sales double-weighted but only used for defense manufacturing companies and mutual funds. X X X No, property 5%; payroll 5%; sales 90% No, SBT is not an income tax but has similar provisions. Michigan (Single Business Tax VAT) Minnesota No X X X No, property 12.5%; payroll 12.5%; sales 75% Mississippi No X X X Yes Missouri Yes, completely X X X Yes Montana Yes, completely X X X Yes Nebraska No X No, 100% sales factor Nevada Nevada does not impose a corporate income tax New Hampshire No X X X No, property 25%; payroll 25%; sales 50%

11 New Jersey No X X X No, sales double-weighted New Mexico Yes X X X Yes, however, certain manufacturers double-weight sales New York No X X X No, property 25%; payroll 25%; sales 50% For tax years beginning on or after 1/1/06, property 20%; payroll 20%; sales 60% For tax years beginning on or after 1/1/07, property 10%; payroll 10%; sales 80% For tax years beginning on or after 1/1/08, 100% sales X X X No, property 25%; payroll 25%; sales 50% North Carolina Yes, officers salaries excluded from the payroll factor; sales factor excludes casual sales North Dakota Yes X X X Yes X X X No, property 20%; payroll 20%; sales 60% Ohio Yes, sales to government attributed to destination state; distinctions between business and nonbusiness income have been adopted for years ending on or after 6/26/03. Changes equal H.B. 95 effective for years ending on or after 6/26/03 Note A. New law net income apportionment. For taxable years ending on or after 6/26/03, Ohio franchise tax law distinguishes business income from nonbusiness income and the net-income base property, payroll, and sales factors specifically exclude that portion of property, payroll, and sales to the extent that the portion relates to, or is used in connection with, the production of nonbusiness income allocable under O.R.C. section For example, for taxable years ending on or after 6/26/03, real property that generates allocable nonbusiness rental income is excluded from the numerator and the denominator of the net income base property factor. See O.R.C (B)(2) as amended by Amended Substitute House Bill 95, 125th General Assembly. In apportioning net income for taxable years ending before 6/26/03, prior law and case law apply. New law net worth base apportionment. For taxable years ending on or after 6/26/03, the net worth base property, payroll and sales factors specifically include that nonbusiness property, payroll and sales excluded from the net income base factors under the paragraph above. If the taxpayer had nonbusiness income, then in apportioning net worth for taxable years ending on or after 6/26/03, see the following: schedule D-2, the instructions for schedule D-2, and O.R.C (C)(2) as amended by Amended Substitute House Bill 95, 125th General Assembly. In apportioning net worth for taxable years ending before 6/26/03, and in apportioning net worth for taxable years ending on or after 6/26/03, if the taxpayer does not have nonbusiness income, use the net income apportionment ratio without adjustment. Complete the form FT 1120 schedule D apportionment ratio on a separate company basis. The separate company apportionment ratio applies to the net worth base even if the taxpayer is a member of a combined report, form FT 1120C. See O.R.C (D)(3) which states that the taxpayer's net worth is multiplied by the net income base apportionment formula computed... without regard to section of the Revised Code. The taxpayer's apportionment ratio on the combined report (schedule D - combined) applies only to the net income base, not to the net worth base. I-499

12 I-500 Apportionment Formulas (Part 1) (continued) Legend: X These factors are used in apportioning business income NA Not applicable NR Not reported Generally Used Factors Does State Follow UDITPA? Sales Property Payroll Are the Factors Weighted Equally? Note 1. The aggregate (conduit) theory of taxation applies to the franchise tax. That is, the character of all income and deductions (and adjustments to income and deductions) realized by a pass-through entity retains that character when recognized by the investor in the pass-through entity. Furthermore, the investor s proportionate share of the pass-through entity's property, payroll and sales must be included in the investor s apportionment formula. See Mead Properties, Inc. v. Limbach, BTA Case Nos. 85-D-791, 85-E-792, 85-C-793, 85-B-794, 4/21/89, Effective for taxable years ending on or after 9/29/97, Amended Substitute House Bill No. 215, 122nd General Assembly (Budget Bill) codified into the franchise tax statute the conduit theory (see O.R.C ). Note 2. A taxpayer must adjust its net income (or loss), its apportionment factors and its credits to the extent that the taxpayer s income (loss), apportionment factors and credits would include, were it not for this law, the taxpayer's proportionate share of such amounts attributable to the taxpayer's direct or indirect ownership interest in an exempted investment. An exempted investment is the taxpayer's direct or indirect investment in a pass-through entity or a disregarded entity (a single member LLC that is treated as a division of its owner) which is a public utility subject to the Ohio public utility excise tax on its gross receipts (see O.R.C as amended by House Bill 770). Oklahoma No X X X Yes, sales factor double-weighted under some circumstances X X X No, property 25%; payroll 25%; sales 50%. For tax years beginning on or after 5/1/03, the apportionment formula will be sales 80%, property 10%, and payroll 10%. For tax years beginning on or after 5/1/05, sales 90%, property 5%, payroll 5%. For tax years beginning on or after 5/1/07, sales 100% Oregon Yes, but double-weighted sales factor. For tax years beginning on or after 5/1/03, the apportionment formula will be sales 80%, property 10%, and payroll 10%. For tax years beginning on or after 5/1/05, sales 90%, property 5%, payroll 5%. For tax years beginning on or after 5/1/07, sales 100% X X X No, property 20%; payroll 20%; sales 60% Pennsylvania Not officially adopted or enacted; however, many statutory provisions are similar to UDITPA. Rhode Island No X X X Yes, however, for years beginning 1/1/04 or later, manufacturers can phase in double weighted sales over 2004 and South Carolina For guidance, not authority X X X No, property 25%; payroll 25%; sales 50% South Dakota South Dakota does not impose a corporate income tax

13 Tennessee Yes, except no throwback X X X No, sales factor double-weighted Texas No X Utah Yes X X X Yes Vermont No X X X Yes Virginia Yes, UDITPA not adopted, but Virginia law is similar X X X No, sales factor double-weighted Washington Washington does not impose a corporate income tax West Virginia Yes X X X No, property 25%; payroll 25%; sales 50% X X X No, before 1/1/06; 50% sales, 25% property, and 25% payroll; after 12/31/05 and before 1/1/07; 60% sales, 20% property, and 20% payroll; after 12/31/06 and before 1/1/08; 80% sales, 10% property, 10% payroll; and after 12/31/07; 100% sales Wisconsin Yes, management fees are included in the payroll factor; the sales factor is double-weighted; no throwback of sales to foreign countries; government sales treated differently. Wyoming Wyoming does not impose a corporate income tax I-501

14 I-502 Apportionment Formulas (Part 2) Legend: NA Not applicable NR Not reported Does State Allow/Require Allocation of Specific Items When Apportionment Does Not Fairly Apply? Does State Eliminate Factor if Denominator Is Zero? Numerator Is Zero? Does State Allow Separate Accounting? Alabama Yes, written permission required Yes No Yes, written permission required Alaska Yes Yes No Yes Arizona Yes Yes No Yes Arkansas No Yes No Yes, for nonbusiness and partnership income items only No California No Yes No, but possible if insignificant values, see RTC Colorado Yes, determined on a case by case basis No No Yes, determined on a case by case basis Yes No Yes, Connecticut-source limited partnerships income (non-unitary); see (h), a (rarely applied). Connecticut Yes, for interests in limited partnerships (nonunitary), see (h), a (rarely applied). Delaware No Yes No Yes, statute requires allocation of rents, royalties, interest, and gains or losses on real and tangible property. District of Columbia Yes, with permission Yes No Yes, with permission Yes No In specific cases, with permission only (varies depending on the taxpayer s situation) Florida Yes, with permission (varies depending on the taxpayer s situation) Yes No Yes, investment or nonbusiness income by petition Georgia Yes, with permission from revenue department

15 Hawaii Yes Yes No Yes Yes No Yes, nonbusiness income and all deductions relating to its production must be allocated. Idaho Yes, when separate accounting is a more accurate reflection; taxpayer holds burden of proof. Yes No Yes, only with Director s approval Illinois Yes, separate accounting (to determine where income was earned) is used only with Revenue Director s approval and only if statutory apportionment formula does not fairly represent extent of business activity in state, see 86 Ill. Admin. Code Yes No Yes, may petition for use if standard apportionment does not fairly reflect income derived in state Indiana Yes, may petition for use if standard apportionment does not fairly reflect income derived in state NA NA Yes, for any item of income that qualifies for nonbusiness income Iowa Yes, if activities in state are not unitary with activities outside of Iowa Yes No Yes Kansas Yes, with prior approval from Secretary of Revenue Kentucky No Yes No No Louisiana Yes Yes No Yes Maine Yes, must be petitioned for Yes No No Maryland No No No Yes, but only with prior written approval from the Comptroller s Office Yes Yes Only on pre-approval Massachusetts Yes, only allowed upon pre-approval of taxpayer s application by commissioner Yes, requires approval by State Treasurer Yes No Yes Michigan (Single Business Tax VAT) Minnesota Yes Yes No Yes I-503

16 I-504 Apportionment Formulas (Part 2) (continued) Legend: NA Not applicable NR Not reported Does State Allow/Require Allocation of Specific Items When Apportionment Does Not Fairly Apply? Does State Eliminate Factor if Denominator Is Zero? Numerator Is Zero? Does State Allow Separate Accounting? Mississippi Yes, at Commissioner s discretion Yes No Yes, at Commisioner s discretion Missouri Yes. Written authorization must be obtained Yes No No Montana Yes, depends on facts Yes No Yes, depends on facts Nebraska In unique and nonrecurring situations NA NA In unique and non-recurring situations Nevada Nevada does not impose a corporate income tax New Hampshire No Yes No No New Jersey No Yes No No New Mexico No Yes No Yes, nonbusiness items New York Yes, fact driven Yes No Yes, discretionary as to facts and circumstances North Carolina No Yes No No North Dakota No Yes No Yes Yes Yes Yes, rents, royalties, patent copyright royalties, dividends, technical assistance fees, and capital gains and losses not otherwise deducted are required to be allocated Ohio Yes, when the allocation and apportionment provisions do not fairly represent the extent of taxpayer s business activities in state; approval by tax commissioner required Oklahoma Yes, generally oil and gas companies Yes No Yes

17 Yes No Yes, nonbusiness income from net rents, royalties, capital gains and losses, interest, dividends, lottery prizes, patent and copyright royalties is allocated. Oregon Yes, when application of standard apportionment and allocation provisions do not fairly represent the extent of the taxpayer s business activities in Oregon. (ORS ) Pennsylvania Yes Yes No Yes Rhode Island No Yes No No South Carolina Yes, but must first receive permission Yes No No South Dakota South Dakota does not impose a corporate income tax Tennessee Yes, requires approval of variance Yes No Yes, requires approval of variance Non-unitary income (except interest and dividends) is allocated to Texas if Texas is the commercial domicile. If either numerator or denominator of gross receipts factor is zero, the apportionment percentage is zero. Texas No If either numerator or denominator of gross receipts factor is zero, the apportionment percentage is zero. Yes No Yes, follow UPITPA and only allow allocation when income constitutes nonbusiness income Utah Rarely allowable; burden of proof on party seeking to deviate from the UDITPA formula Vermont No Yes No No Yes No Yes, per Allied-Signal Virginia No alternative methods may be requested, but rarely granted Washington Washington does not impose a corporate income tax West Virginia Yes Yes No Yes, nonbusiness income Wisconsin Yes, when business is not unitary Yes No Yes, nonbusiness income Wyoming Wyoming does not impose a corporate income tax I-505