Multistate Income Tax

Chapter 4Apportionment and Allocation

Learning objectives

• Distinguish between apportionment and allocation.
• Identify the differences between business and nonbusiness income.
• Recognize the two tests of business and nonbusiness income.
• Identify how to handle the problem areas of rental income, gains and losses, intangible property, interest, and dividend income.

Introduction

A company doing business in more than one state really has only three alternatives for sorting out what income goes to what state. They are (1) separate accounting, (2) allocation, and (3) apportionment. As we have seen from looking at case law, separate accounting has gone the way of the horse and buggy whip. That leaves allocation and apportionment, and both methods are used in consolidated and combined filing. Allocation refers to income that is specifically assigned to a particular state. Apportionment is the sourcing of income based upon some formula, usually a combination of the company’s payroll, property, and sales.

Current rules

Today’s rules regarding apportionment and allocation originated in the 1950s through the efforts of state representatives. In 1957, these representatives, through the National Conference of Commissioners, drafted the Uniform Division of Income for Tax Purposes Act (UDITPA). The goal of UDITPA was to promote uniformity among the states in the allocation and apportionment of multistate corporate income. Currently, some 30 states have adopted UDITPA in whole or in part, ...