Articles · Basics · State and Local Tax (SALT)
State Apportionment Explained
A multistate business cannot be taxed on all its income by every state. Apportionment uses a formula to assign a share of income to each state.
The formula
Historically, many states used an equally weighted three-factor formula of property, payroll, and sales. Most states have now moved toward a single sales factor, which looks only at the share of sales in the state.
For example, a company with $10 million of income and 20% of its sales in a single-sales-factor state apportions $2 million to that state, before state modifications.
Sourcing sales
Sales of goods are generally sourced to the destination. Services and intangibles traditionally followed cost of performance, but many states have moved to market-based sourcing, which looks to where the customer gets the benefit.
Some states use throwback or throwout rules for sales not taxed elsewhere.
Why it matters
Rules differ, so total apportionment across states may not equal 100%. Some income can be taxed twice, and some not at all. Non-business income may be allocated to a single state instead of apportioned. Preparers should keep a sales-by-state workpaper and document their sourcing method.
Key takeaways
- Many states use a single sales factor.
- Market-based sourcing looks to the customer.
- State totals may not add up to 100%.
For general education only, not tax advice. Tax law changes often, so confirm current rules and amounts with primary sources.