Key Takeaways
- Understand State Tax Apportionment: Before expanding across state lines, know how each state allocates and apportions income to avoid double taxation and penalties.
- Know the Sourcing Method: States use either cost of performance or market-based sourcing to tax revenue—understand which applies to your business in each state.
- Track Apportionment Factors: Be aware of how states use sales, payroll, and property (single or three-factor methods) to calculate your tax liability.
- Watch for Throwback Rules: Some states apply throwback or throwout rules that can unexpectedly shift tax obligations back to your home state.
Doing business outside your state of incorporation creates additional state and local tax obligations. Understanding allocation and apportionment of taxes is key for corporations that do business in multiple states, as it helps to ensure accurate governmental reporting. Besides filing your earnings with the IRS, you must report to local and state governments and pay applicable taxes other than in the incorporated state.
It is crucial to understand apportionment and throwback or throwout rules for each of the states in which your business operates, as these might influence double taxation for your business. Before expanding to another state, a business must plan to consider taxation consequences and related issues in allocating income between states.
Cost of Performance: What is Apportionment in Tax?
Apportionment is the method used to divide a company’s income among states for tax purposes. The two main types of apportionment are cost of performance and market-based sourcing, each determining where income is taxed. States use either a single-factor (sales) or three-factor (sales, property, payroll) method to calculate how much income is taxable in that state.
Accounting for sales by employing the single sales factor is useful. It benefits in-state production and exports more of the tax burden to out-of-state businesses. The single sales method allocates revenue to a state based on the percentage of total sales occurring within a state.
To determine the percentage amount, you may need to divide the amount of the receipts sourced within the state, under the cost performance or market-based sourcing, by your total receipts, inside the state and outside.
Some reasons for apportionment include corporate income double taxation prevention and reducing tax liabilities. Understanding corporate tax codes for each state, including the throwback rule, can be confusing and complex. Indeed, corporate taxation requires each state to apportion the income of corporations with locations in multiple jurisdictions and states. After all, under the throwback rule, generally, sales in a designated state are not apportioned and are thrown back into the original incorporated US state for taxation.
Differences Between Market-Based and Cost of Performance Apportionment
The key difference is that market-based apportionment taxes income where the customer is located, while cost of performance taxes income where the service is performed. Here’s a quick comparison:
Aspect | Cost of Performance | Market-Based Sourcing |
How income is sourced | Based on where the service is performed | Based on where the customer receives the service |
Common in… | Older method, still used in a few states | Most states now use this approach |
Impact on taxation | Favors states where the business operates | Favors states where the customer is located |
Risk of double taxation | Can occur in overlapping states with mixed sourcing methods | Also at risk if not coordinated with other state rules |
Doing Business in Multiple States? Know Your Tax Responsibilities
When your business operates in states beyond where it’s incorporated, you may face multi-state tax obligations at both the state and local levels.
Why Apportionment Matters for Your Business
Understanding allocation and apportionment is critical for businesses operating in more than one state because:
- You must file and pay taxes in each state where your business has a nexus (economic or physical presence).
- Each state may tax a different portion of your income.
- Incorrect apportionment can lead to double taxation or penalties.
- States may apply throwback rules, affecting where sales are taxed.
For Georgia businesses selling online—whether through your own site, Shopify, Amazon, or other marketplaces—you may be subject to income tax in multiple states due to:
- Economic nexus: Selling a certain dollar amount or number of transactions to another state (e.g., $100,000 in sales or 200 transactions in California).
- Marketplace facilitator laws: Even if Amazon collects sales tax for you, income tax responsibilities may still apply.
- Inventory in fulfillment centers: If your products are stored in out-of-state warehouses (e.g., Amazon FBA), you may create a physical nexus.
Plan Ahead Before Expanding Across State Lines
Before entering a new state market, businesses should:
- Evaluate tax consequences in the new state.
- Determine how income will be allocated or apportioned.
- Understand whether the state uses market-based or cost of performance sourcing.
- Identify any throwback rules that may apply.
Q&A: Understanding Tax Apportionment for Georgia Businesses
Q: What’s the difference between cost of performance and market-based apportionment?
A: Cost of performance sources income based on where services are performed. Market-based apportionment sources income based on where the customer receives the service. Georgia uses market-based sourcing for most service businesses.
Q: How do I know which states I owe corporate income tax to?
A: You may owe taxes in any state where your business has a nexus—this can be physical (a warehouse) or economic (reaching a sales threshold). Each state then applies its own apportionment rules to determine how much of your income is taxable there.
Q: What is the throwback rule, and does it apply in Georgia?
A: The throwback rule requires that out-of-state sales with no taxable nexus be “thrown back” to the home state for tax purposes. While Georgia does not have a throwback rule, it’s important to know if your other business states do.
Q: Why is apportionment essential for eCommerce or online businesses in Georgia?
A: Apportionment affects how much of your income is taxed in different states. With market-based sourcing, customer location, not seller location, often determines tax liability, which is crucial for businesses selling nationwide.
Why work with multi-state accounting experts?
At Fusion CPA, we understand interstate accounting and taxes and can set up the software to help with interstate accounting, to save you money in deductions, penalties, and more. It is a risk for any business owner to experience tax issues at an interstate level. After all, it can cost millions of dollars in tax fines and a steep penalty. An accurate accounting setup to factor in a multi-state organization is significant for those businesses. Our CPA team can help explain the allocation and apportionment of taxes for businesses via a discovery call.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.