Apportionment

Apportionment is the determination of the percentage of a business’s profits subject to a given jurisdiction’s corporate income tax or other business tax. US states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders.

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Landscape

The traditional evenly weighted three-factor apportionment method weighs property, payroll, and sales in equal measure. Increasingly, many states have shifted to single sales factor apportionment, where only a company’s sales are taken into account, with the intention of benefiting in-state production while exporting more of the tax to foreign (out-of-state) companies. Courts have granted states substantial leeway in adopting competing approaches to apportionment, but some requirements must be met, most notably:

1. The tax must bear some rational relationship to companies’ activities in the state (external consistency); and
2. The apportionment formula must ensure that no more than 100 percent of a corporation’s income would be taxed if every state chose the same formula—even if, in practice, the interaction of differing standards can yield double taxation (internal consistency).

Design

There is not an obviously “correct” approach to corporate apportionment. A company’s payroll and property in a state are more closely related to its operations there, the costs it imposes, and the benefits it receives from good governance, but all states include sales into the state as a factor, and the majority use it as the sole factor.

Most states have adopted single sales factor apportionment to “export” the state’s corporate income tax burden. In other words, single sales factor apportionment reduces tax burdens for businesses that have most of their property and payroll in the state but only a small proportion of their national sales in the state, while increasing tax burdens for out-of-state companies that have minimal property or payroll in the state but a large proportion of their national sales in the state. Some states stop short of single sales factor but use “double weighted” sales factor; previously, several states used other apportionment formulae that gave a disproportionate weight other than 50 percent to sales.

Sales of tangible property are sourced to the destination of the sale, but accounting for the sale of services is more complex. Some of the corporate income-taxing states emphasize, in varying ways, the location where a service’s benefit is received. This is known as market or benefit sourcing and contrasts with sourcing rules that emphasize the location where a greater proportion of a company’s income-producing activity takes place.

In some states, apportionment factors vary by industry, and occasionally some or all businesses have a choice of apportionment factors. Generally, however, states use the same apportionment factors for all corporations. Each state’s primary apportionment method is shown below.

State Primary Apportionment Factors for Tax Year 2025
Three-Factor (6)	50% Sales (3)	Single Sales (38)
Alaska	Florida	Alabama
Hawaii	Virginia*	Arizona*
Kansas	West Virginia	Arkansas
New Mexico		California
North Dakota		Colorado
Oklahoma		Connecticut
		Delaware
		Georgia
		Idaho
		Illinois
		Indiana
		Iowa
		Kentucky
		Louisiana
		Maine
		Maryland
		Massachusetts*
		Michigan
		Minnesota
		Mississippi
		Missouri
		Montana
		Nebraska
		New Hampshire**
		New Jersey
		New York
		North Carolina
		Oregon
		Pennsylvania
		Rhode Island
		South Carolina
		Tennessee
		Texas***
		Utah
		Vermont
		West Virginia
		Wisconsin
		District of Columbia
* State offers alternative apportionment factors as well, either as an optional election or as a requirement for select industries. ** New Hampshire’s business profits tax has single sales factor apportionment, but its business enterprise tax uses three-factor apportionment. *** Texas’s Margin Tax, a gross receipts tax, uses single sales factor apportionment. Gross receipts taxes in other states do not follow corporate apportionment formulae. Source: State statutes; Tax Foundation research.

 

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