Just a few years after William Shakespeare’s death, the English Parliament passed the Petition of Right, a major step forward in the history of taxation in that it prevented the Crown from creating new taxes without Parliament’s approval. Had Bill lived just a few more years, he would have witnessed the King’s discretion severely limited. While this limit on discretion was certainly helpful as it related to new and arbitrary taxes, discretionary authority certainly has a place in modern day state taxation, especially when it relates to allocation and apportionment of income.
I’ve blogged many times about and as a Firm have issued more formal publications regarding the current thinking in state apportionment formulas. I’ve explained the traditional three factor method of property, payroll and receipts as compared to the trend towards a single receipts factor. We have discussed the evolution away from a manufacturing to a service economy and as a result the total revamping of sourcing rules as they relate to the performance of services. The technical details and variations are the subject of many an article and treatise.
Yet after following the rules to the letter of the law and regulations, sometimes the result makes absolutely no sense. Remember, apportionment formulas were designed and have evolved so that the earnings sourced to a particular jurisdiction properly reflect what was in fact earned—in that jurisdiction.
I can’t think of a jurisdiction whose law doesn’t provide some mechanism for the tax authority, either on its own accord or at the behest of the taxpayer, effectively throw the statutory scheme out the window in favor of an alternative that makes some sense. Maybe separate accounting for an activity is required to properly reflect income in the jurisdiction? Perhaps one or more of the factors needs to be eliminated (less common these days as we move towards one factor formulas) or adjusted?
The point being, discretion can and should be used in the right circumstances. One must be mindful though of the reluctance of the authorities to utilize it and who needs to make the request and when. Regardless of the timing, taxpayers need to be prepared with financial data to back up any request. Going into an audit without a reasoned and documented approach to deviate from the statute often doesn’t end with a good result.
If you are confounded by state apportionment formulas and need assistance, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.
 For the record, I know very little about Shakespeare and have struggled through his writings every time I was compelled to read one. I even know less about 17th Century English taxation but needed what I deemed a clever way to tie in the phrase “discretion is the better part of valor” to a blog about discretionary adjustments as they relate to state apportionment formulas. Just so you know, the Shakespeare quote is from “Henry The Fourth” and in relevant part states “The better part of valor is discretion, in the which better part I have sav’d my life.” No thanks to past High School English teachers, but many thanks to the Internet (and Al Gore) as well as Wikipedia. All apologies to Shakespeare scholars and 17th Century tax experts.