State Alternative Apportionment Is Worth Taxpayers’ Attention

Alternative apportionment can enhance state tax systems, benefit state taxing authorities, and provide positive outcomes to taxpayers. Taxpayers could benefit from keeping informed on this evolving area of tax law.

Either party may invoke alternative apportionment if they believe the standard apportionment formula doesn’t fairly reflect income attributable to the state. That states may impose it on taxpayers presents taxpayers with an equivalent chance to request it themselves if the current method doesn’t fairly reflect the taxpayer’s business activities within the state.

Additionally, taxpayers may be able to successfully challenge a method imposed by the state, as the burden of proof generally falls on the party pursuing the alternative apportionment method.

Most states with corporate income taxes allow the use of alternative apportionment methods in specific situations. Section 18 of the Multistate Tax Commission’s Uniform Division of Income for Tax Purposes Act permits reasonable deviation from a state’s statutory apportionment formula when the allocation and apportionment provisions don’t fairly represent the taxpayer’s business activities in the state.

This provision establishes a fundamental fairness test that is applied to a state’s standard apportionment formula. If the standard apportionment rules fail this fairness test, the taxpayer may use an alternative method.

Many state statutes and regulations allow taxpayers to request—or the state’s taxing authority to require—an alternative apportionment method. Some states use this authority actively to impose such a method on taxpayers. For instance, revenue departments have used these statutes to force combined filings by taxpayers and impose market-based sourcing methods.

The examples below demonstrate instances of states asserting alternative apportionment on taxpayers.

South Carolina

The South Carolina Supreme Court held in 2010 that UDITPA Section 18 permits taxpayers and the state’s Department of Revenue to use any other method to achieve an equitable apportionment of the taxpayer’s income, including the combined reporting apportionment method.

A South Carolina Administrative Law Court decision from 2023 upheld forced combined reporting as an equitable and reasonable alternative apportionment method for achieving fair representation of the taxpayer’s in-state activity.

But recent legislation in the state has limited the revenue department’s ability to use alternative apportionment to force combined reporting.

S.C. Code Section 12-6-2320 now establishes parameters for when the department may require a taxpayer to file a combined return, when the department must provide notice, and how taxpayers may appeal the department’s determination of state net income.

If the South Carolina Department of Revenue continues to pursue forced combined reporting, this may open the door for taxpayers to request relief to file in a similar manner if advantageous to them.

Tennessee

Tennessee courts have established that the Tennessee Commissioner of Revenue may impose an alternative apportionment method when the application of the statutory formula doesn’t fairly represent the extent of the taxpayer’s business activity in the state.

The Tennessee appeals court upheld in 2009 the commissioner altering the taxpayer’s apportionment formula to increase the amount of franchise and excise taxes owed by the taxpayer.

The Tennessee Supreme Court determined in 2016 that the statutory cost-of-performance sourcing methodology didn’t fairly represent the taxpayer’s business activity, and that the commissioner’s imposition of market-based sourcing wasn’t an abuse of discretion and constituted an acceptable alternative.

That year, Tennessee enacted legislation adopting market-based sourcing of receipts from sales other than tangible personal property.

Arkansas

Arkansas also has used its alternative apportionment authority to require market-based sourcing.

The Arkansas Department of Finance and Administration in 2016 upheld the denial of the taxpayer’s corporate income tax refund claim after the taxpayer attempted to amend its returns from market-based sourcing to an income-producing activity method.

The department required the taxpayer to use market-based sourcing, claiming the method more fairly and accurately represented the taxpayer’s activity in Arkansas than the standard statutory income producing-activity method.

Arkansas has since enacted legislation adopting market-based sourcing of receipts from sales other than tangible personal property for tax years beginning on and after Jan. 1, 2026.

Challenges and Opportunities

The ever-changing landscape of alternative apportionment offers both challenges and opportunities for taxpayers and state tax authorities alike.

As states increasingly assert their authority to impose alternative apportionment methods, taxpayers should remain proactive in evaluating whether the standard or imposed methodologies fairly reflect their business activities in the state.

Being informed on state actions—such as those in South Carolina, Tennessee, and Arkansas—may empower taxpayers to request alternative apportionment or challenge state-imposed methods when appropriate.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Joe Garrett is a managing director, Allison Anderson is a senior manager, and Gabby Domangue is a tax senior at Deloitte Tax LLP’s Multistate Tax Services practice.

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