Alternative apportionment: tough for the taxpayer, (too) easy for the states.

• Author: McCoy, Glenn C., Jr.

In recent years, the proliferation of different methodologies in state apportionment has intensified the concerns over double taxation and the overall fairness of apportionment rules. Alternative apportionment provisions aim to provide limited relief through the possibility of "opting out" of the standard apportionment formulas when their application would produce particularly inequitable results. As a matter of fact, however, these provisions mostly have been used by the states as an additional tool to claim a bigger slice of the pie.

In a perfect world, multistate businesses would be able to apportion their income in a manner that properly reflects their economic activity in each state. In the real world, it has been recognized that it is impossible to provide a precise answer to the division of income question (Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159 (1983)). Apportionment formulas instead are used to approximate the amount of income that a business earns within a state. As is the case with approximations, situations exist where the income allocated to a state under the standard methodology is clearly inconsistent with the extent of the activities in that state. Such a distortion is more likely to affect nontraditional industries such as service providers, information technology companies, or businesses that integrate traditional operations and financial services.

The U.S. Supreme Court has thus far been reluctant to disturb the statutory apportionment formulas mandated by the states (but see Hans Rees' Sons v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931), in which a single factor formula was found to be arbitrary and unreasonable). However, many state statutes incorporate a specific provision that is intended as a last resort in those limited circumstances when the standard approach would be grossly inadequate. Most statutory schemes provide that the state tax authority may require, and the taxpayer may petition for, a departure from the apportionment formula if the apportionment provisions do not fairly represent the extent of the taxpayer's business activity in the state. In fact, the Multistate Tax Commission (MTC) model statute includes a similar provision. Under the MTC formulation, when circumstances require, income may be allocated through the use of separate accounting, the exclusion of one or more of the factors from the formula, the inclusion of additional factors, or any other method that may result in an equitable allocation of the income (see Uniform Division of Income for Tax Purposes Act...