Chapter 5Apportionment Formulas and Factors

Learning objectives

  • Recognize the calculation of the traditional “Massachusetts formula.”
  • Recognize the elements of the payroll factor.
  • Identify the computation problems of the property factor.
  • Recognize the boundaries of the sales factor.


Once we have established the right to apportion, we must turn our attention to the apportionment formula and the factors within that formula. The U.S. Supreme Court has declined to favor one apportionment method over another. For example, the Court upheld Iowa’s use of a single factor (sales) in apportioning income in Moorman Mfg. Co. v. Bair, 437 U. S. 267 (1978). With Moorman the court has let it be known that, absent clearly flagrant distortion (Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123 (1931), perhaps), it is not going to be in the business of judging the validity of various state apportionment methods.

Although there is increasing variation in state formulas, most states initially adopted some form of the “Massachusetts formula.” (Supposedly, the drafters of the Uniform Division of Income for Tax Purposes Act or UDITPA used Massachusetts as an example in their drafting.) Historically, the “Massachusetts formula” was derived by determining the average of three separate factors: payroll, property, and sales.

Payroll, property, and sales factors

Put simply, the payroll factor is determined by comparing in-state payroll to payroll everywhere. The property factor is ...

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