One of the most frequently litigated issues under the New York State corporate franchise tax is the apportionment of income. This is due in part to an inherent conflict between state governments, which seek to attract businesses to expand their in-state activities by offering tax exemptions, and state tax departments, which then need to collect funds from (in many cases) a shrinking tax base. Private state-tax advisors, particularly tax departments inside large corporations, devote much of their time looking for ways to reduce the income apportionable to high-tax jurisdictions. Some of these issues are apparent in the recent Division of Tax Appeals administrative law judge (ALJ) determination in Expedia, Inc.1
Two recent developments have had a major impact on apportionment issues. First, New York, like many other states, abandoned the previous standard apportionment based on three factors—property, payroll, and receipts—in favor of a single factor receipts formula, under which the percentage of income of a corporation apportionable to New York is determined by dividing the New York receipts by worldwide receipts.2 This formula has been adopted explicitly to encourage corporate taxpayers to expand their in-state facilities and hire more people on the theory that they can do so without increasing the portion of their income apportionable to that state.
