Opinion ID: 1115733
Heading Depth: 3
Heading Rank: 1

Heading: The Three Methods For Division Of Income

Text: Separate accounting attempts to carve out of the taxpayer's overall business the income derived from sources within a single state, and by accounting analysis, to determine the profits attributable to that portion of the business. [7] Income within the state is determined without reference to the success or failure of the taxpayer's activities in other states. [8] In the case of goods (such as crude oil) sent to another state for processing, separate accounting values these goods at the price which could be obtained for them in their unprocessed form when leaving their state of origin. [9] In other words, separate accounting recognizes that crude oil has a marketable value before it is refined.
Specific allocation by situs refers to the method of dividing a tax measure (in whole or in part) by tracing particular property, receipts, or income to their source state, and attributing the item in its entirety to that state. [10] This method is troublesome because more than one state is likely to have a legitimate basis for taxing the same item, especially when the tax is one measured by income. [11] The specific allocation method has been used commonly with non-business income such as income from dividends, patent and copyright royalties, and gains or losses from the sale of capital assets. [12] Under UDITPA, some non-business income of this nature is allocated in its entirety to the situs state. See AS 43.19.010, art. IV, §§ 5-8. Confusion may arise because the separate accounting methodology is very similar to the specific allocation approach. Both methods attempt to trace income to an identifiable source. The primary difference in the two methods is that separate accounting looks to the activities in the state and seeks to determine the income related to that activity. Specific allocation attributes income according to situs, or some other specific characteristic of the business enterprise, rather than on the basis of where the income itself was earned. Moreover, specific allocation results in all of a specified type of income and all associated profits being allocated to one state. Separate accounting, on the other hand, attempts to segregate out only those profits attributable to activities within the state for taxation by that state.
Formula apportionment is the method commonly used to divide the income of a unitary business [13] among various jurisdictions in which the business operates. The formula method, unlike separate accounting, does not purport to identify the precise geographical source of a corporation's profits; rather, it is employed as a rough approximation of a corporation's income that is reasonably related to the activities conducted within the taxing State. [14] The formula method assumes that the total income of a business enterprise results from certain income producing factors  typically property, payroll and sales. The value of the corporation's property, payroll and sales within the taxing state is compared with the value of these factors outside the taxing state. The resulting ratio is then multiplied by the total apportionable net income worldwide of the multi-state corporation. [15]