Welcome back. Now, when it comes to figuring out what a taxpayer's proportionate percentage is for particular state, we have to look and see what factors the state uses. Originally, when UDITPA was first promulgated, it recommended an equally weighted three-factor apportionment formula. The original three UDITPA factors were sales, property, and payroll. So let's do an example with the original UDITPA equally weighted three-factor formula. Let's suppose that Acme incorporate operates in both State A and State B and they have the required minimum of connection and substantial nexus with both states to properly subject them to income taxation and they're not protected by public law 86,272. For example, maybe their activities in both states rises above the level of mere solicitation. Acme has half million dollars of sales in both state a and state B. Acme has a $100,000 of property in State A, no property in State B, and Acme has a $100,000 of payrolls in State A, but none in State B. If both State A and B using equally weighted three factor formula, then Acme's apportion that percentage for each state would look like this. For State A, the sales factor is 50 percent, the property factor is a 100 percent, and the payroll factor is a 100 percent. The average of 50 percent, 100 percent, 100 percent, is 83.33 percent. So State A is apportionment percentage is 83.33 percent. For State B, we have a sales apportionment factor 50 percent, while property and payroll are both zero percent. The average of 50 percent, zero percent gives us an apportionment percentage in State B of 16.67 percent. If Acme had $10,000 in net income using formulary apportionment with equally weighted three factor formulas, 8,333 would be taxable in State A and 1,667 would be taxable and State B. In this example, exactly 100 percent of Acme's income will be subject to tax somewhere. But not every state uses the same apportionment formula, let alone uses the same definitions for what constitutes sales property and or payroll that go into those factor calculations. Now let's suppose instead of an equally weighted three-factor formula, State B in our example instead, adopts a single factor sales formula. State A is apportionment percentage of 83.33 percent would be unchanged, but with a single factor sales formula, state B's apportionment, percentage would now be 50 percent. If Acme had $10,000 in net income using formulary apportionment, 8,333 would be taxable in State A, and 5,000 would be taxable in State B, that's over 100 percent of their income subject to tax. While the Dormant Commerce Clause requires fair apportionment, the Supreme Court has said that the Constitution is neutral with respect to a which apportionment formula a state should adopt. If a uniform rules desired, then it's up to Congress to use their affirmative grant of power from the Commerce Clause to make it so, which they have not elected to do. So a fair apportionment from the complete autotest mitigates double taxation, but it does not prevent it. Of course, this disparity in apportionment of formulas can benefit tax payers as well. Going back to our example, let's suppose that State A was a single factor sales state, and State B was an equally weighted three-factor formula state. Well now, the results for Acme are going to look quite different. They will have an apportionment percentage of 50 percent in State A and 16.67 percent in State B. If acme had $10,000 in net income using formulary apportionment, 5,000 would be taxable in State at A, 1,667 would be taxable in State B. That's less than 100 percent, not bad. Now I told you that an equally weighted three-factor formula was in the original UDITPA. Historically, equally weighted three-factor formulas have been the most popular among the states. But over the last couple of decades, there has been an extremely fast move to single-factor sales formulas. At the end of 1995, only five states used a single factor sales formula. But then, states started to put extra weight on the sales factor. For example, they double weight of the sales factor, or even triple weight of the sales factor. Eventually, states started dropping the payroll and property factors all together. Today, a majority of the states use a single factor sales formula. Why is the single factor sales formula so popular among the states? Well, one thought is that it doesn't penalize a business for locating payroll and property within a state. In other words, if you invest more capital within a state and hire more workers within a state, it's not going to increase your apportionment percentage for the state. State lawmakers are quite fond of attracting both capital investment and jobs to their state. The flip side to this, is that the apportionment formula using a single factor sales doesn't reward businesses for having property and payroll located outside the state, and ultimately, state lawmakers have this incentive to reduce the taxes of the people who vote for them, which includes those in state businesses with property and payroll within the state. To increase taxes on the people who can't vote for them, which are those out-of-state businesses without property and payroll within the state.
