Apportionment
Apportionment
• Apportionment is a ratio or formula intended to represent the
level of business the company is conducting within a state.
3-factor formula
• Evenly weighted property, payroll, sales
• States trending away from evenly weighted 3-factor formula
• Double-weighted sales
• Single sales factor
Property
• Averages values are used
• Most states use original cost, some states use NBV (NJ)
• Rented property is valued at eight times the net annual rate
Payroll
• Compensation is defined as wages, salaries, commissions and
any other form of remunerations paid directly to employees
for personal services
• Generally should tie to your IRS Form 940
• Some states do not include officer’s compensation in payroll
factor
• Payments made to independent contractors are generally
excluded
Sales of TPP
• Sales of Tangible Personal Property (“TPP”) are generally in
state if:
• It is delivered or shipped to a purchaser within the state,
regardless of the f.o.b. point or other conditions of the sale.
Sales of Services
• Cost of Performance
• Market based sourcing
Cost of Performance
• Gross receipts from services are attributed to a state if the
activity is performed wholly within the state.
• If the activity is both within and without a state, it is included
in the receipts factor of the state where the greater
proportion of the income-producing activity is performed,
measured by costs of performance.
Analyzing Cost of Performance
• Taxpayer determines what activity produced the income
• Cost of performance analysis conducted
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Determine the costs associated with the activity
Determine the states in which those costs were incurred
• Cost of performance rule is all-or-nothing approach
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Entire sales are attributed to the single state in which the
greater proportion of the costs of performance is incurred
Income-producing activity (MTC)
• Term applies to each separate item of income, examples
include:
• The rendering of personal services by employees or the use of
tangible or intangible property by the taxpayer in performing a
service
• The sale, rental, leasing, licensing, or other use of real property
• The rental, leasing, licensing, or other use of tangible personal
property
• The sale, licensing, or other use of intangible personal property
Cost of Performance (MTC)
• Direct cost that is incurred for a specific purpose and is
traceable to that purpose
• Example: The direct costs associated with a service contract
for maintaining business equipment would include both the
cost of repair parts and the compensation costs of the service
technicians.
• Indirect costs (including G&A) are not included in cost of
performance analysis
Market-based sourcing
• Receipts from services attributed to a state based on where
service recipient is located
• GA, IL, IA, ME, MD, MI, MN, UT, WI
• CA in 2013
• Can create double taxation if you are doing services in a COP
state but have customers receiving the benefit in marketbased sourcing states
• MTC currently uses COP, but has proposed an amendment to
use market-based sourcing
Sourcing of Intangibles
• States vary widely on sourcing of intangibles
• Always check state rules here
Special industries
• States may have specific apportionment formulas for the
following:
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Airlines
Railroads
Trucking companies
Financial institutions
Television and radio broadcasters
Publishers
Telecommunication service companies
Mutual funds
Pipeline companies
Ship transportation companies
Professional sports franchises
Steps to completing apportionment
• Sum apportionment totals
• Tie out apportionment to the workpapers
• Gross receipts and property should tie to the trial balance
• Payroll should tie to 940s (check against TB for large deviation)
• Compare to PY apportionment
• Look for new states that have factors present – consider whether
to file there
• Look for states where factors may have swung largely
Steps to completing apportionment
(cont.)
• Input apportionment into ProFx
• If you have a state where there is everywhere sales, property or
payroll, but that respective state does not have any of these
factors, input a zero for that state in the Allocation and
Apportionment worksheet.
• Verify that everywhere columns per ProFx tie to apportionment
workpapers
Inputting apportionment in ProFx
Steps to completing apportionment
(cont.)
• Things to watch out for
• Market-based sourcing versus COP sourcing states
• Most states are COP, but if you have a market-based sourcing state,
you will have to input that numerator separately
• Everywhere sales may differ by state
• Sub-part F and Section 78 Gross Up
Changing everywhere totals
Common State worksheet, A&A – Total everywhere overrides
Changing everywhere totals
Common State worksheet, A&A – Total everywhere overrides