Formulary apportionment is widely used in the US to determine how a multistate company’s profit is allocated and taxed across the states in which it operates. While apportionment methods vary by state, they are typically based on formulas that use combinations of the company’s sales, payroll, and tangible property to determine the portion of income taxable in that state.

When formulary apportionment produces results that inadequately represent the extent of a taxpayer’s business activity in a particular state, both taxpayers and state taxing authorities have the right to petition for alternative apportionment methods. However, the circumstances and thresholds that require the use of alternative apportionment are ambiguous, because there is little concrete guidance on using alternative apportionment methods or how to reliably determine “fair” apportionment.

To address this, Principals Dr. Ara Stepanyan and Evan Cohen and Senior Associate Dr. Margaret McKeehan have coauthored an article examining the circumstances for alternative apportionment methods, and an approach to reliably measure the value of in-state business activity. The full Tax Notes State article, “An Empirical Economic Framework for State Corporate Tax Apportionment,” is available below.

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