State Alternative Apportionment Requests: Lessons From a Virginia Ruling

December 13, 2021

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By: Aspen Fairchild, SALT Senior Associate

At a glance

  • The main takeaway: Income for state income tax purposes is usually apportioned based on property, payroll and/or sales, but that method may not fairly reflect a taxpayer’s activities in the state.
  • Key considerations: Based on a recent ruling out of Virginia, there are three items taxpayers must consider when requesting an alternative apportionment method.
  • Rely on expert advice: Contact Aprio’s State and Local Tax (SALT) team for help with navigating alternative apportionment requests in your state.

Schedule a free consultation today to learn more!

The full story:

For state income tax purposes, income is typically apportioned based on some combination of property, payroll and/or sales the taxpayer has within the state, with sales generally the dominant or sole factor.

But what if that method doesn’t provide the best representation of a taxpayer’s activities in the state? Most states allow taxpayers the option to request an alternative apportionment method if the taxpayer believes the state’s method produces an unjust result and that there is a more accurate approach. However, making a successful alternative method election is more difficult in practice than in theory, as exhibited in a recent Virginia Department of Taxation (the Department) Letter Ruling.[1]

A summary of the ruling

The taxpayer in this case is a limited partnership that owns rental property in four different locations, including one property in Virginia. The income or loss for each property is readily available and the taxpayer believes separate accounting is a more accurate reflection of income attributed to the state than using the state’s statutory apportionment formula. The taxpayer submitted the ruling request to the Department as its official request to allocate income in the state based on separate accounting of its rental properties.

From the Department’s final letter ruling response, there are three items taxpayers must consider when making similar requests:

1. Determine whether the statutory method is constitutionally valid

If a state’s allocation and apportionment methods are rationally related to the business transacted within a state, the method is constitutionally valid. It is understood that these methods will not produce an exact result, but rather are designed to approximate income from business transacted in the state. Therefore, the use of property, payroll and/or sales factors has withstood constitutional scrutiny.

Nonetheless, the Supreme Court has recognized the possibility that the application of the state’s constitutional formula may produce an apportionment percentage that rises to the level of an “unconstitutional result.” The challenge for any taxpayer requesting an alternative method is proving that the state’s method causes an “unconstitutional result” for them. Taxpayers must provide “clear and cogent evidence” that the income apportioned via the state’s formula is disproportionate to business transacted within the state, or that it created a “distorted result.”[1]

In a 2019 Virginia Supreme Court decision, the Court noted that double taxation by itself does not violate the United States Constitution.[2] States will inevitably follow different methods and are granted wide power to do so; because of this, it is extremely difficult for taxpayers to prove an “unconstitutional result.”

2. Do some research to understand the state’s approach to alternative apportionment

Has the state in question previously received a similar alternative apportionment method request? If so, this could indicate the specific factors the state looks at, either favorably or unfavorably, to make its determination.

For example, even if a taxpayer is unable to prove an unconstitutional result as described above, Virginia permits taxpayers to request permission to utilize an alternative apportionment method when the statutory method is inequitable. Under Virginia’s regulation, inequity only occurs if:

  1. The apportionment method results in double taxation of income to the taxpayer, and
  2. The inequity is attributable to Virginia’s statutory method, not another filing state’s method.[1]

In the letter ruling, the Department notes its “long-standing policy” against using separate accounting, and the fact that separate accounting methods may cause different results than the statutory formula does not mean that the formula inequitable.

The Department also references two other letter rulings in which it previously addressed alternative apportionment methods for real estate rental businesses that denied the use of separate accounting because the taxpayers were unable to prove that the statutory formula produced an unconstitutional result or was inequitable.[1]

3. Follow the state’s established procedures for submitting requests

 If the taxpayer still believes its case for an alternative apportionment method could be successful, the final step would be to submit the method request. States have generally outlined the proper procedures to do this within their statutes and regulations or other administrative guidance.[1]

The Department’s letter ruling ultimately determined that the taxpayer did not follow any of its established procedures for making an alternative apportionment method request, and that it never received enough information to make any constitutional or inequitable determination. Based on this and previous state guidance, the Department denied the taxpayer’s method request.

The bottom line

Alternative apportionment can provide taxpayers with an opportunity to reduce their income tax liability in their state, but it’s not a simple procedure. Aprio’s SALT team has experience with alternative apportionment issues and can help assess your situation and guide you through the process to increase the likelihood of a successful result.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Aspen Fairchild, SALT Senior Associate, at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This content was featured in the November/December 2021 SALT Newsletter.

[1] See Virginia Code §58.1-421.

[2] Virginia Department of Taxation P.D. 99-195 (7/21/1999) & P.D. 09-47 (4/27/2009).

[3] 23VAC10-120-280.

[4] See Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123, 135 (1931).

[5] Corp. Exec. Bd. Co. v. Virginia Department of Taxation, 297 Va. 57, 822 S.E.2d 918 (2019).

[6] Virginia Department of Taxation Letter Ruling 21-100 (7/27/2021).


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.