You are the tax advisor to a company (the Company) that had $1,000 in apportionable business income

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Question:

You are the tax advisor to a company (the “Company”) that had $1,000 in apportionable business income for tax year 2019. The Company did business in 4 states in 2019 and had nexus in each of the 4 states. The breakdown of its property, payroll and sales factors in each state is set forth below. Each State’s tax rate is set forth in the last column.

State A State B State C State D Total Payroll 100 100 200 600 1000 Propert 100 100 200 600 1000 Sales 600 300 100 0 1000 2013 Tax Rate 50% 50% 40% 3 0%

State A uses a single-sales factor formula. State B uses the three-factor formula, but it triple-weights the sales factor. State C uses the three-factor formula, but it double-weights the sales factor. State D uses the traditional three-factor formula (property, payroll and sales) and weights each factor equally. Assume that no factors are thrown-out, even if zero.

a. Calculate the taxes owed by the Company in each state for the 2019 tax year and the total taxes owed by the Company for the year.

b. Would the total 2019 taxes owed by the Company be higher or lower if each of the States used the traditional three-factor formula (with each factor equally weighted) and why? (You are not required to calculate the exact taxes on this question, but you may).

c. If the Company were able to show using separate accounting that only $300 of its income for the tax year should be apportioned to State A (which would result in $150 taxes owed for 2019), would this prove that State A’s apportionment calculation was unconstitutional when applied to the taxpayer? Is State A’s use of a single-sales factor formula unconstitutional?