Monday Map: State Corporate Income Tax Apportionment Formulas

Today’s Monday Map shows state corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formulas. These formulas are used by states to determine what percentage of a corporation’s profits are taxed. Generally, three categories are used: property, payroll, and sales.

As an example, consider a company whose corporate office is located in North Carolina and has the bulk of its staff living and working in North Carolina, but maintains a small sales office across the border in South Carolina. To put hard numbers on it, 90% of its property and 90% of its payroll are in North Carolina. However, half of its sales are to customers in South Carolina.

Since North Carolina’s apportionment formula is 25/25/50 (property, payroll, sales), the company multiplies its percentages for each category by the apportionment percentages:

(90% x 25%) + (90% x 25%) + (50% x 50%) = 70%

70% of the firm’s profits are subject to North Carolina’s corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. .

South Carolina is different – its apportionment formula is 0/0/100, known as a “single sales factor” formula – sales are all that matter. The calculation for South Carolina looks like this:

(10% x 0%) + (10% x 0%) + (50% x 100%) = 50%

50% of the firm’s profits are subject to South Carolina’s corporate income tax, and thus the firm gets taxed on 120% of its income.

Courts have ruled that, in order for a corporation to be subject to a state’s income tax, it must have a physical presence, or “nexus,” in that state – sales on their own are not enough to create nexus. A corporation that has nexus in only one state while still selling to consumers in other states often ends up with “nowhere” income – income not taxed by any state – particularly if its home state has a sales-heavy apportionment formula. Many states have adopted what are known as “throwback” rules, which deem sales to states where the firm has no nexus as sales within the state for the purposes of apportionment, thus eliminating the problem of “nowhere” income.

Click on the map to view the full-size version.

View previous Monday Maps here.

(Note: this map has been altered since it was originally posted – an error for Rhode Island’s shading was corrected, and the color scheme has been altered.)

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