In general, income for corporation business tax purposes is divided into two categories: business income and nonbusiness income. Business income is apportioned to a state by use of a formula while nonbusiness income is allocated to a particular state. Business income includes income from transactions and activity in the regular course of a taxpayer's trade or business. Nonbusiness income is all income other than business income (interest, dividends, capital gains). (Some states apportion all income).

Molly Corporation realized $1.5 million of taxable income from the sales of its service products in States A and B. Both states employ a three-factor apportionment formula that equally weighs sales, property, and payroll. Molly Corporation's gross sales, property and payroll attributable the states is as follows:

State A State B Totals

Gross sales $2,000,000 $2,000,000 $4,000,000

Property $2,500,000 0 $2,500,000

Payroll $1,500,000 0 $1,500,000

Income tax rate 10% 5%

Apportionment of Taxable Income to State A

Sales Factor $2,000,000/$4,000,000 = 50%

Property Factor $2,500,000/$2,500,000 = 100%

Payroll Factor $1,500,000/$1,500,000 = 100%

Sum of Apportionment Factors = 250% /3 = 83.3%

Taxable Income Apportioned to State A = 83.3% x $1,500,000 = $1,249,500

Tax Rate State A 10%

Tax Liability, State A $124,950

Would the tax liability be reduced if State A utilized a single factor apportionment formula only (no payroll or property factors)? If yes, why would a state use this type of apportionment? Why is the current trend among states to use single factor market based sourcing for services?