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simultaneous apportionment fac- limited to) the costs of personnel, Recommended best practices
tor representation. equipment, and facilities involved Taxpayers who sell interests in mul-
If the sale transaction is included in with the transaction, such as those tistate partnerships have plenty to
the factor, the next question to address taxpayer-personnel who negotiated consider from a state and local income
is whether the net gain on the transac- and closed the deal. Taxpayers should tax standpoint. If 2021 was any in-
tion or the gross proceeds are included be aware that cost-of-performance dication (based on the sampling of
in the factor. If the gross proceeds sourcing varies among the states. Some developments provided above), there
from the transaction are included, this states may source the entire gain to the will likely be additional case law and
may provide taxpayers the benefit of one state where the greatest portion administrative decisions addressing
watering down the apportionment per- of the costs are incurred, while other this area in the future. Further, the
centage in states where the gain is not states may source the gain to multiple Multistate Tax Commission (MTC),
sourced to the sales factor numerator. states based on the percentage of costs an intergovernmental state tax agency
If the state provides that the net incurred in each state. that strives to promote uniformity in
gain is included in the factor, the tax- The trend among states continues to state tax law, has formed a focus group
payer has some additional questions move toward the second methodology specifically addressing partnership
to address. First, if the sale transac- — market-based sourcing. As its taxation; the state tax treatment of
tion resulted in a net loss, how is that name implies, market-based sourcing partnership interest sales is one area of
treated for apportionment purposes? generally looks to the location of focus. While the state taxing authorities
States may provide that net losses are the customers or beneficiaries of the are not bound by MTC recommenda-
excluded from the factor, even if net transaction. Taxpayers should also note tions, many states may choose to follow
gain transactions are included. Second, that various iterations of market-based the recommended guidance. With the
if the partnership sale transaction was sourcing exist among the states, whose complexity and continued develop-
a net gain and the taxpayer had other statutes couch sourcing in language ments in this area, taxpayers are advised
transactions that resulted in a net such as “where the benefit is received” to discuss with their tax consultants the
loss, how are those net losses treated? (e.g., California and Indiana) or “where state tax considerations around these
States have different rules on whether the transaction is delivered” (e.g., transactions (e.g., the apportionment/
net losses offset gains in determin- Alabama, the District of Columbia, and allocation considerations above and
ing the amounts from net gain/loss Pennsylvania). Taxpayers are cautioned installment sale considerations as to
transactions that are included in the to pay attention to definitions within when the tax should be paid). Review-
apportionment factor. these provisions but especially ing each of the highlighted focus areas
definitions in any state regulations, above, taxpayers may be able to avoid
Sourcing as these are usually far more detailed, double-taxation pitfalls, potentially
If the net gain or gross proceeds are cover different types of transactions, uncovering opportunities.
included in the sales factors of the and may yield different sourcing From Ilya Lipin, J.D., LL.M., and
states where the gain is subject to in- results even among the market-based John Damin, CPA, J.D., Philadelphia
come tax, the final question to address sourcing states.
is which states the gain or proceeds on With all the allocation/
the transaction should be sourced to for apportionment methods discussed Tax Accounting
sales factor purposes (i.e., which states’ above, readers may be wondering about
sales factor numerator). With the sale the possibility of double taxation. For New accounting method
of a partnership interest being a sale of example, if one state claims the gain to change procedures issued
other than tangible personal property, be allocable income, can others try to for small business taxpayers
sourcing these transactions generally obtain some or all of the taxable share? The IRS and Treasury released two
falls into one of two buckets. Also, with the varying apportionment revenue procedures (Rev. Procs. 2022-9
The first bucket is methodologies, can the sums of the and 2022-14) on Dec. 16, 2021, and
cost-of-performance sourcing, which state apportionment percentages Jan. 31, 2022, respectively, on ac-
will generally source the sale to the exceed 100%? Sadly, in the area of counting method change procedures.
states where the direct costs that apportioning/allocating sales of other Rev. Proc. 2022-9 modifies Rev. Proc.
produce the revenue are incurred. than tangible personal property, double 2019-43, the exclusive revenue proce-
Direct costs that factor into this taxation is not only possible but is dure for automatic consent account-
determination include (but are not rather common. ing method changes, to enable small

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