When must state apportionment be fair? Always. If a state’s normal apportionment formula is operating unfairly with respect to your company, you need to consider the alternatives. The United States Supreme Court has articulated a four-part test for determining whether a state tax burdens interstate commerce in violation of the Commerce Clause of the United States Constitution. Pursuant to one part of that test, a state tax is constitutional when the tax is “fairly apportioned.” What is fair apportionment? To be fairly apportioned, a state tax must be both “internally consistent” and “externally consistent.”

The internal consistency test looks to the overall structure of the tax at issue and asks whether the tax would necessarily disadvantage interstate commerce when compared with intrastate commerce if every state enacted an identical taxing scheme. Inasmuch as an internally inconsistent tax impermissibly burdens interstate commerce on its face, the tax is per se invalid in all cases, without the need for further consideration of the economic reality of how the tax applies.

Originally published in Tax Executive Volume 69, Number 3 on June, 1 2017.