Multistate US tax issues for inbound companies: Part II - multistate apportionment

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Multistate US tax issues for inbound companies: Part II - multistate apportionment

us2.jpg

Non-US entities may be familiar with the US federal tax concept of effectively connected income. That is, being taxed on income that is derived from a US business; however, for multistate tax purposes, a percentage of the entire net income of an entity (or group of entities, as discussed below) may be subject to tax by a state. That percentage generally relates to the proportionate level of activity the entity has with the state as compared with its activity outside the state.

Activity may be measured by the relative in-state sales, property, payroll, or any combination of the three. Some states give greater weight to sales activity than property and payroll. A current trend among states is a move to a single-sales weighted apportionment factor. A single-sales factor results in states increasing their taxable reach among out-of-state taxpayers because the absence of in-state property and payroll does not serve to dilute the apportionment percentage assigned to the state as it would for a state that incorporates a property or payroll factor.

Complexities arise as states do not uniformly apportion income. For example, the assignment of service income to a particular state may be treated in various ways. Some states source service income to the location where the provider incurs the greater cost in performing the service. Other states employ a marketplace approach, sourcing to where the customer receives the benefit of the service.

Sales of tangible personal property are generally sourced to the state of destination. One exception applies to the extent a state has a throwback rule. Under throwback, sales are sourced to the state of origin if the taxpayer does not have nexus with the destination state or country.

The potential combination of a state asserting nexus based merely on a company having a certain threshold level of sales in a state, along with a single-sales factor apportionment regime and US treaties not binding the state, could result in substantial state income tax liability for an inbound company.

Joel Walters, based in Washington, DC, is PwC's US Inbound Tax leader. Maureen Pechacek, based in Minneapolis, and Todd Roberts, based in Denver, are partners in the firm's State and Local Tax practice. The authors give special thanks to Michael Santoro.

This is the second in a series of articles looking at multistate US tax issues facing inbound companies. Part I looked at instances and activities that could subject a foreign entity to state tax. Look out for Part III next week.

more across site & shared bottom lb ros

More from across our site

Using tax to enhance its standing as a funds location is behind Luxembourg’s measures aimed at clarifying ATAD 2 and making its carried interest regime more attractive
Encompassing everything from international scandals to seismic political events, it’s a privilege to cover the intriguing world of tax
In his newly created role, current SSA commissioner Bisignano will oversee all day-to-day IRS operations; in other news, Ryan has made its second acquisition in two weeks
In the age of borderless commerce, money flows faster than regulation. While digital platforms cross oceans in milliseconds, tax authorities often lag. Indonesia has decided it can wait no longer
The tariffs are disrupting global supply chains and creating a lot of uncertainty, tax expert Miguel Medeiros told ITR’s European Transfer Pricing Forum
Corporate counsel should combine deep technical knowledge with strategic dynamism, says Agarwal, winner of ITR’s EMEA In-house Indirect Tax Leader of the Year award
Luxembourg’s reform agenda continues at pace in 2025, with targeted measures for start-ups and alternative investment funds
Veteran Elizabeth Arrendale will lead the new advisory practice, which will support clients with M&A tax structuring, post-deal integration, and more
MAP cases keep increasing, and cases closed aren’t keeping pace with the number started, the OECD’s Sriram Govind also told an ITR summit
Nobody likes paperwork or paying money, but the assertion that legal accreditation doesn’t offer value to firms and clients alike is false
Gift this article