APPORTIONMENT: BY TOTAL

What is "APPORTIONMENT?"

Apportionment is the technical term for deciding how much of a firm's business income is taxed in the state. For a company with all of its business in Utah and which has no presence outside the state, the apportionment fraction is 100 percent. A very large firm with operations all over the country, by contrast, may have a fraction less than 1 percent.

The rule adopted by Utah and by many other states uses a three-factor formula to determine a firm's Utah income. The wage factor is the ratio of state wages to U.S.- wide (water's edge) wages; similar ratios are calculated for sales to Utah residents relative to U.S.-wide sales and property values. The apportionment fraction is then the average of these three ratios. (A firm with no wages company wide, for example, would only average two factors.)

The larger a firm is, generally, a smaller percentage of its income is taxed in Utah. That of course is not surprising, since almost by definition a large company will be operating in many states and will only have a small portion of its activity in Utah. By contrast, a company with all of its operation in Utah is bound to be small.

Table 3.1 reports the apportionment factor for various sized firms. In this figure and the parent charts in appendix C, income is measured as U.S.-wide business income for the company, as defined by Utah law. That is, all adjustments made to federal taxable income definitions, such as the limited charitable contribution deduction, the non-allowance of state taxes as a deduction, and the more generous deduction for business expenses, have been made. However, the income has not been reduced yet by apportionment to its Utah equivalent. The apportionment factor is the income- weighted average factor for all companies in the same class.

The table is for 1999 for non-minimum taxpayers, but basic data is available in appendix C for 1998 as well.

TABLE 3.1
APPORTIONMENT FACTORS
1999 TAXYEAR NON-MINIMUM TAXPAYERS
UNAPPORTIONED INCOME	RETURNS	TOTAL	PROPERTY	WAGE	SALES	AVERAGE
INCOME						TAX
NO INCOME	32	.	.	.	.	.
$ 1 - 25,000	1,978	96.87%	97.21%	97.21%	96.66%	$663
$ 25,001 - 50,000	841	93.38%	93.90%	93.98%	93.11%	$1,693
$ 50,001 - 75,000	525	90.36%	90.56%	91.11%	90.34%	$2,683
$ 75,001 - 100,000	314	85.61%	86.94%	86.51%	85.51%	$3,533
$ 100,001 - 500,000	900	68.03%	70.02%	69.21%	67.87%	$8,520
$ 500,001 - 1,000,000	316	43.40%	45.03%	44.96%	41.69%	$14,646
$1,000,001 - 5,000,000	652	15.65%	16.20%	15.68%	15.19%	$18,793
$5,000,001 -10,000,000	299	7.25%	7.82%	7.71%	6.40%	$25,481
OVER $10,000,000	1,142	0.78%	0.78%	0.82%	0.76%	$452,188
TOTAL	6,999	1.02%	1.02%	1.05%	0.98%	$446,005

As logic predicts, the share of income that is taxed in Utah declines as the companies get bigger. Companies in the bottom three brackets (income below $75,000) have over 90 percent of their economic presence in Utah. By contrast, companies with income over $10 million have less than 1 percent of their activity here. For all companies not paying the minimum tax, the weighted average apportionment factor is only 1.02 percent, compared to 1.5 percent in 1993. Overall wages are the largest factor and sales are the smallest.

As well as being factually interesting, the above data indicate an interesting policy conclusion. For companies that pay the most taxes and are the largest nationwide, the state can do very little to improve or worsen the fiscal situation of the firm. For example, for a large firm that suffers a loss, the provision of a Utah loss carryback and the refund of previous taxes will not have much impact on the firm's health. Similarly, for large firms, the size of the Utah charitable deduction is likely to be inconsequential for determining the firm's contributions.

Are there industry differences?

Since so many of our companies do a small portion of their business in Utah, we should not expect any sector to be Utah dominated. For all sectors, the average factor is the same 1.02 percent as above.

Nonetheless, there are important differences in the apportionment factor, by major industry. As Table 3.2 shows, Construction and Manufacturing are more likely to have a higher share of their activity here, while Mining and Wholesale trade are smaller here. This is not surprising, given the small and local scale of many construction companies. By contrast, the Mining and Wholesale Trade sectors are more dominated by large national or international firms. The author was a bit surprised at the relatively large factor for Manufacturing. At this point, we think it is good to remind the reader that we are only considering firms that are incorporated as C corporations, and not the many small local operations that are sole proprietors or partnerships, or even S corporations.

TABLE 3.2
APPORTIONMENT FACTORS
1999 TAXYEAR NON-MINIMUM TAXPAYERS
SECTOR	RETURNS	TOTAL	PROPERTY	WAGE	SALES	AVERAGE
						TAX
NOT CODED, OTHER, OR NON-DISCLOSABLE	1,784	0.60%	0.62%	0.50%	0.64%	$31,194
AGRICULTURE, FORESTRY, AND FISHING	143	1.80%	1.43%	2.90%	1.07%	$557,350
MINING	52	0.28%	0.42%	0.15%	0.26%	$116,942
CONSTRUCTION	639	2.93%	2.83%	2.86%	3.11%	$175,731
MANUFACTURING	538	2.30%	2.75%	2.70%	1.46%	$481,806
TRANS., COMM., UTILITIES	211	1.38%	1.31%	1.53%	1.31%	$1,073,825
WHOLESALE TRADE	1,064	0.44%	0.36%	0.38%	0.58%	$384,397
RETAIL TRADE	768	1.40%	1.42%	1.42%	1.36%	$951,120
FINANCE, INSURANCE, AND REAL ESTATE	549	1.69%	1.68%	1.82%	1.57%	$577,906
SERVICES	1,251	1.35%	1.30%	1.45%	1.31%	$265,427
TOTAL	6,999	1.02%	1.02%	1.05%	0.98%	$446,005

An alternative apportionment scheme

Not all states use the three factors as explained above, some weight sales more heavily, several even use sales only. The reason behind these schemes is to give more favorable treatment to firms that produce in the state or that have more of a presence than selling output. We do not want to imply that Utah should do that in this section, we are neutral to that proposal. Although the major purpose of such a change is not meant to aid a particular size category or industry, it is interesting to examine the impact in those contexts. We will address these questions only as an example of how this data may be used.

If the sales factor were less than the overall factor, then giving more weight to that factor would decrease total collections. Conversely, if sales were greater than the total factor, then giving it more weight would increase collections. Both the tables show that the sales factor is smaller than the weighted average, thus giving that factor more weight would reduce revenue.

The sales factor is less for all sizes of firms in table 3.1, so all sizes would benefit as a group, but the larger benefit would be to the larger firms and the largest benefit is to firms in the $5 million to $10 million range. We should make clear that any statement about benefits to a size group applies to a group on the average and not to all members of the category.

Addressing the same question by sector, the sectors where the sales factor is largest relative to the total factor are Wholesale Trade, Construction, and Not Coded, table 3.2. So giving higher weight to sales would mean higher taxes for these sectors. All other sectors would face lower taxes, with the largest reductions being in Agriculture and Manufacturing. Retail Trade comes the closest to being neutral, with a 1.36% sales factor and a 1.4% total factor. This is probably since the traditional retail business requires making sales generally using local workers and locations. This may change with the growth of Internet transactions.