Alternative Apportionment: Requesting Relief From Unfair Allocations, Common Alternative Methods, State Nuances

Following Wayfair, and with more states moving to single-factor sales apportionment, more businesses are finding relief by utilizing alternative apportionment methods. Statutory formulas for apportioning income often yield disproportionate results for particular companies. These formulas, developed with manufacturers and tangible property sellers in mind, can result in apportion distortion for service-oriented and SaaS companies.

All states offer some type of apportionment relief. The taxpayer requests permission to use an alternative method from the relative tax authority and the burden of proof remains with the taxpayer to show that the statutory methods are distortive and, therefore, unfair. In single-factor apportionment states, taxpayers have successfully argued that the three-factor apportionment method is more determinative in certain situations. Other taxpayers have used transfer pricing studies and separate accounting as acceptable methods to establish more reasonable determinations of state income tax liability. SALT advisers working with multistate businesses must understand the nuances of alternative apportionment to ensure businesses are not burdened with more than their fair share of state income tax.

Listen as George W. Rendziperis, JD, Managing Director, State and Local Tax at M+D Consulting, reviews common scenarios where alternative apportionment can provide a fairer tax allocation and explain how to apply for alternative apportionment in certain states.