When a business operates in multiple states, no single state can tax 100% of its income. Instead, each state uses an apportionment formula to calculate the percentage of business income that is taxable within its borders. Getting this formula right matters miscalculating apportionment can result in either overpayment or an unexpected liability.
Historically, most states used a three-factor formula including property (where your assets are located), payroll (where your employees work), and sales (where your customers are). Today, a majority of states have shifted to a single-factor formula based entirely on sales called the sales factor or receipts factor to attract businesses to locate payroll and property within their borders.
For a CPG company selling nationally from a single warehouse, a sales-factor-only state means the company pays tax to that state only in proportion to sales made to customers in that state. Property and payroll in the warehouse state do not increase the company’s tax burden in the customer states.
For multi-state retailers with physical stores, the sales factor is usually the largest component, but property and payroll in high-tax states like California and New York can still create significant apportionment in those states even where a sales-only formula applies to services.
Bottom Line: If you’re selling in five or more states and filing only in your home state, you are likely both overpaying your home state and underpaying other states where you have nexus. An annual apportionment review is a core part of multi-state tax compliance.