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The Tax Lawyer

Help Wanted: Achieving Better Formulas for Apportioning Income, Residence and Intangibles Through the Use of Information Not Generated for Tax Purposes

Darien Shanske


There are so many areas of state and local tax practice that are in flux.  Many of these issues are potentially very significant, seemingly more important for the future of SALT than mere apportionment formulas - my chosen topic.  This may well be so.  Yet many of these other issues are in a certain way inessential to the underlying task of state and local tax as a discipline.  As I see it, the essence – and challenge, even beauty – of state and local tax is that it is concerned with the fair and reasonable allocation of revenue in an economically integrated federal system.  As forms of commerce and employment change, coming up with better is essential, which is why other federations and the OECD are dealing with the same issues and arriving at similar solutions.  By contrast, other hot issues, such as the interpretation of the Internet Tax Freedom Act, are parochial and, from my perspective, “own goals” as to the coherence of our overall system.  With luck, these issues will one day disappear, but the need for better apportionment formulas will not.

In this article, I will consider the current state of apportionment formulas, the need for better formulas and offer some ideas, based on national and international experience, for improving formulas.

At the risk spoiling the surprise, I would summarize the key arguments of this Article as follows.

1.  States should strive to improve apportionment formulas and not be seduced by faux rigor that would essentially introduce (failed) transfer pricing methodologies.

2. States must make sure that their sales factors are applied on an ultimate destination basis.

3.  Ultimate destination can be challenging to apply and therefore states must make sure that the application of these rules do not create the opportunity for systematic gaming.

4.  A key way to achieve better rules is to rely on information collected by the taxpayer for some other purpose or on more general economic data that is more refined than population.

5.  Solutions to the challenge of remote work that would cut out the formerly obvious source states are economically inefficient and politically untenable.  Apportionment of remote worker income is the way forward, which will likely require additional thinking about apportionment formulas.

6.  Allocating capital gains – either from the sale of a business or other intangibles – to one jurisdiction is a curious holdover that is less and less tenable.  Such gains should also be subject to apportionment.  Here too, there is room for more thinking about improving formulas.