What is it? Apportionment involves dividing business income among multiple jurisdictions based on a formula. The problem is, that every state uses a slightly different formula!

Essentially, it's the process of spreading out or distributing income according to specific criteria or factors so that each jurisdiction gets its "fair share" of the taxable income.  Do not worry about double taxation between states...it is extremely rare due to offsetting credits. 

Primary Factors Affecting Apportionment:

• Sales Factor: This looks at the proportion of a business's sales that occur in a particular jurisdiction. For example, if 40% of a company's sales happen in State A, then State A would get to tax 40% of the company's apportionable income.  
• Property Factor: This factor considers the proportion of a company's property that is located in a given jurisdiction. This includes real estate, equipment, and other tangible property.
  • Some states, such as California, consider Amazon inventory to be property! Watch out for this as the FTB in CA is extremely aggressive in collecting their share. 
• Payroll Factor: Reflects the proportion of a company's payroll that's paid to employees in a particular jurisdiction.  Post Covid, many companies employ team members across state lines.  This may, in many cases, force you to file income taxes at both the business AND the owner's personal level in this state!

Many states in the U.S. have shifted towards a "single sales factor" apportionment, where only the sales factor is considered, placing less emphasis on or completely disregarding the property and payroll factors.  **In 2024** Massachusetts is moving to this formula!

Other Considerations:  If you are hiring employees in other states, the state MAY require your business to legally register at the Secretary of State level, in addition to with the DOR. 

Definition: Allocation is the assignment of certain types of income (often non-business income) directly to a specific jurisdiction. Instead of spreading the income out based on a formula, the income is "allocated" to a particular place, typically where the income was earned or where the property generating the income is located.

Primary Factors Affecting Allocation:

• Nature of Income: Typically, passive types of income, such as rents, royalties, or interest, are subject to allocation rules. Each jurisdiction will have its own rules for how different types of income are allocated.
• Location of Property: Income from tangible property (like rental income from real estate) is typically allocated to the jurisdiction where the property is located.
• Business Domicile: For certain types of income, the business's domicile or primary place of business can play a role in allocation decisions but not everything.
  • In practice, if the business has K1 income in 5 states, the owner is going to have to report the income in each state and offset relevant taxes with credits from each state.  This complexity seems unnecessary but the states all want their fair share.

When a multi-state or multi-national business calculates its taxes, it will first allocate specific types of income and then apportion the remaining business income based on the relevant formula.

This introductory guide is to ensure you, as a business owner or investor, understand the basics of state taxation.  We will expand upon this further in future guides!