Question

Explain how double weighting of the sales apportionment factor favors firms located in a state with examples.

Answer 1

Apportionment formulas are designed to allocate to a taxing state, for tax purposes, a share of a company's income that corresponds to its business activity in the state. State formulas use one or more factors to determine each company's overall income apportionment percentage. Most states require all corporations to use the same apportionment formula, but 10 states have more than one formula and require or allow different types of businesses to use different formulas.

The elements of the apportionment formula are the property factor, the payroll factor and the sales factor. The apportionment formula gives doubleweight to the sales factor and equal weight to both the property and payroll factors. If any factor is not utilized in the production of business income, it shall be eliminated and the denominator reduced accordingly.

As noted in the literature, increasing the sales factor weight has different implications for different businesses. Double-weighting the sales factor or using single sales-factor apportionment tends to lower the tax burden of businesses that sell to a national market, but concentrate their payroll and property in a smaller geographic area. On the other hand, companies that sell in the state, but with a low payroll or property presence, face a higher tax burden from double-weighted or single sales-factor apportionment.

EXAMPLE: Company A is a multistate entity which does business both within and without of Alabama. Company A shall apportion its income using the apportionment formula as follow:

Alabama everywhere property 500000 800000 payroll 1500000 3000000 sales 2500000 6000000

Company A must compute its apportionment formula as follows:

Property (500,000/800,000) = 62.5%

Payroll (1,500,000/3,000,000) = 50.0000%

Sales (2,500,000/6,000,000) = 83.33% = (41.667% X 2)

Sum of Factor Percentages = 195.83

Divide by Number of Factors Used 4

Apportionment Factor Average Percentage: 48.9575 %