Apportionment

What is apportionment?

Apportionment is the method states use to divide your business income among the states where you operate, so each one taxes only its share. If your firm has nexus in three states, each state applies a formula to determine what percentage of your total income it can tax. Get the formula wrong and you either overpay or create exposure. Service firms with remote staff and out-of-state clients almost always apportion.

How the formula works in practice

Most states now use a single sales factor: the share of your receipts sourced to that state divided by total receipts. Some still use a three-factor formula weighting sales, payroll, and property. Because states do not coordinate, your percentages across all states may add up to more or less than 100%. That mismatch is normal, not an error, and it is also where double taxation sneaks in if sourcing is handled inconsistently.

Why sourcing drives the answer

For a service firm, the entire apportionment result usually hinges on one question: where is a service receipt sourced? States split between market-based sourcing, which looks at where the client receives the benefit, and cost of performance, which looks at where the work was done. The same engagement can be sourced to two different states under two different rules. Document client locations and where work is performed so your preparer can source receipts defensibly.