Multistate corporate income taxes: An exercise in nexus and apportionment

Editor: Annette Nellen, Esq., CPA, CGMA

Advances in technology have helped companies dramatically expand their customer base beyond their physical location. Digital platforms such as e–commerce websites and mobile apps allow businesses to connect to customers everywhere. With the help of these platforms, even the smallest businesses can now sell their products to customers in all 50 states. While an increase in customers and sales is beneficial, increased sales across state lines may also lead to an increase in a company’s state income tax exposure. Forty–four states impose a corporate income tax. In addition, five states without a corporate income tax impose a gross–receipts tax on businesses: Delaware, Nevada, Ohio, Texas, and Washington. With each of these states having its own laws and regulations regarding the imposition and calculation of the tax, businesses have a challenging time keeping in compliance without the assistance of professional tax advisers.

In addition, the laws regarding when states other than a commercial domicile have the right to impose an income tax on a business are constantly evolving. A state has the right to impose tax on an out–of–state business if that business has nexus with the state. Traditionally, the concept of nexus was thought to exist when a company had a physical presence, either property or employees based in or operating within the state. However, technology–led changes in business models have resulted in businesses moving away from the traditional model of manufacturing plants and traveling salespeople that the original concept of physical presence was based upon.

The evolution of economic nexus

To maintain their share of state income taxes from out–of–state business and to keep up with new business models, states have looked to redefine nexus. In South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), the Supreme Court overturned the traditional physical–presence definition of nexus for sales tax purposes. Instead, the court allowed a more encompassing definition of nexus based on economic presence, specifically, the dollar amount of sales or number of sales transactions the company entered into within that state. Following this case, many states have begun adopting the concept of nexus based on economic presence for income tax purposes as well. Some states have adopted bright–line economic–presence threshold tests, such as California’s and New York’s sales dollar thresholds, while other states have enacted more subjective standards, such as having “substantial” economic activity within the state. As more states implement economic–presence standards for income taxes, the lack of consistent standards creates even more complexity for businesses to navigate (see Jensen, Wilps, Hogroian,and Gillespie, “South Dakota v. Wayfair — Five Years Later,” 54–6 The Tax Adviser 48 (June 2023)).

This ever–changing nexus environment and the increasing complexity of state income tax laws provide significant advising opportunities for tax professionals. While multinational accounting firms have had dedicated lines of service specializing in multistate tax issues for decades, increases in the interstate activities of smaller businesses means smaller accounting firms need to be able to advise clients in this area as well. Developing a thorough understanding of nexus and state apportionment can help accountants focus on minimizing their clients’ state income tax exposure, turning state income taxes into a tax planning engagement, not just a compliance engagement.

The need for instruction

The accompanying Microsoft Excel–based case is designed to give accounting students and entry–level accounting staff experience working with state income taxes and exposure to the concepts of nexus and apportionment. While textbook examples and problems typically require students to compute one apportionment factor, this case study provides students with a comprehensive state apportionment problem. Users must calculate all three apportionment factors (payroll, property, and sales). They must also research income tax nexus rules and research and apply specific state apportionment formulas to calculate income apportioned to specific states. Students must also research and apply the income tax rates of specific states to calculate the company’s state income tax liability.

At the university level, undergraduate accounting programs typically have only one tax course that focuses on federal income taxes, with little, if any, discussion of state income taxes. State income taxes are typically not discussed until graduate–level tax classes, and even then, coverage of the topic may still be light. Therefore, it is important that any state income tax case offers sufficient substance for professors to effectively address the topic without requiring extended classroom time. A review of accounting education journals shows one case study related to multistate taxes for individuals. There are no multistate corporate tax case studies. As technology and tax law changes make multistate income taxes an issue for an increasing number of companies, it is essential for accounting students to grasp key concepts such as nexus and state apportionment.

Using Excel for this case provides several benefits. First, incorporating Excel into the class is consistent with the AICPA’s Model Tax Curriculum and the CPA Evolution Model Curriculum of the AICPA and the National Association of State Boards of Accountancy, both of which note the need for students to develop the technological skills necessary to be successful in the tax profession. Second, students gain experience working with a program (Excel) that practitioners indicate is an essential tax planning and compliance tool. Third, embedded checks throughout the Excel file allow students to monitor their performance and gain confidence with each correct step in the assignment. Lastly, faculty can tailor the requirements for student worksheets to contain Excel skills they want students to demonstrate, such as using “IF” functions.

Case overview

The case requires students to assume the role of an entry–level tax professional in a public accounting firm. Students are given the task of calculating the state income tax liability for a hypothetical multistate C corporation (“Techie Paradise”). Students are provided background client information as well as the client’s payroll, property, and sales data by state. Payroll, property, and sales information for the hypothetical company is provided in Excel, and users are asked to prepare their state apportionment calculations and income tax liability using Excel, which allows students to further develop their skills and confidence with this software tool and to see its value in practice.

The exercise is designed for use in an undergraduate–level tax course. Students at this level will most likely not have been exposed to state apportionment and nexus concepts. As this case allows faculty to introduce these concepts at an introductory level, an overview of nexus and state apportionment is included in the case. The case is also well suited for public accounting firms to use during new staff training since many of those individuals will be responsible for calculating state taxable income and preparing state income tax returns. The case can be adjusted (discussed below) for use with individuals who are more experienced with state income taxes, such as students in a graduate tax course or experienced public accounting staff.

To successfully complete the case, users must first correctly determine which states the company has nexus with for income tax purposes. Then they must research how the states apportion federal taxable income. For purposes of this case study, no state adjustments to federal taxpayer income are provided. If the instructor desires, the case can be made more complex with the addition of a few state adjustments, such as for depreciation. Users then compute the applicable apportionment factors and apportioned state taxable income, using the necessary payroll, property, and sales information provided. Lastly, users research the applicable states’ income tax rates to correctly calculate the company’s state income tax liability.

The case study

The case study packet includes the assignment with relevant company information in Microsoft Word and a Microsoft Excel file, which contains the company’s payroll by state, property by state, and sales by state. The Excel file also serves as a template for students to complete the case. All calculations and answers to the case study are required to be entered into designated cells within the template. The template also contains correction checks after each input to provide students with feedback as they progress through the assignment. The solution file is an Excel file containing separate tabs for (1) property by state; (2) sales by state; (3) payroll by state; and (4) apportioned income calculation and state income tax. To minimize the possibility that students can search for terms and find online solutions, instructors may want to change the company name throughout the case.

The case focuses on the concepts of nexus and state apportionment, as well as the calculations of apportioned state taxable income and state income tax liabilities. Students are provided with background client information, including details about the company’s operations. The company is an electronics retailer with its headquarters in New Jersey that has retail stores in New Jersey and six additional states. The company has employees and property in these seven states only. Company employees may use company vehicles to deliver to customers within these states. Deliveries to customers outside these states, if any, are made via common carrier.

Students are notified that the company, wanting to expand its sales reach, began selling products through a third–party e–commerce website starting Dec. 29, 2025. While most of the online sales made in December were to customers within the states where Techie Paradise already has retail locations, a small number of sales (three) were made to customers in Rhode Island. Students are also informed that the company has no employees or property in Rhode Island and has no other connection to Rhode Island besides these sales.

The case also informs users that they prepared the company’s 2025 federal Form 1120, U.S. Corporation Income Tax Return, which showed taxable income of $24,850,000, all of which is business income, and they are now tasked with calculating the company’s expected state income taxes. As this is typically undergraduate students’ first exposure to these concepts, an overview of the concepts of nexus and state apportionment is provided. The facts and materials provided in the case study are intended to give instructors a starting point for discussing nexus and apportionment concepts, including physical presence, economic presence, remote selling, and apportionment and allocation. Instructors can cover these topics in more depth if desired. The requisite tasks of the case study are as follows:

Task 1: Use the information provided in the “Property by State,” “Sales by State,” and “Payroll by State” tabs in the Excel template file to calculate the company’s apportionment factors for property, sales, and payroll. For the property-by-state factor, use the provided beginning and ending inventory, beginning and ending property at cost, and beginning and ending accumulated depreciation to calculate the average property owned in each state. Then use the calculated average property owned by state to calculate the property apportionment factor. For the sales and payroll factors, use the sales by state and payroll by state provided to calculate the appropriate apportionment factor. Calculated answers should be entered into the purple highlighted fields.

Task 2: For each state in which the company reports sales, research the income tax nexus requirements. On the “Apportioned Income & State Tax” tab of the Excel template, note “Yes” or “No” for each state in the green highlighted column for nexus, indicating whether the company’s activities create nexus with each state for income tax purposes.

Task 3: For each state the company has nexus with, research the required state apportionment formula. On the “Apportioned Income & State Tax” tab of the Excel template, enter the appropriate apportionment formula for each state within the green highlighted fields for “Apportionment Formula.” Enter the formula as one of the following four options: “3 Factor,” “Double wtd Sales,” “Sales,” or “No Nexus.” Then compute the required apportionment formula using the applicable property, sales, and payroll factors computed earlier. The calculated formula (answer) should be entered into the purple highlighted field “Apportionment Factor.“

Task 4: On the “Apportioned Income & State Tax” tab, use the required apportionment formula to calculate apportioned taxable income for each state based upon the provided federal taxable income of $24,850,000. The formula (answer) should be entered into the purple-highlighted “Taxable Income per State” fields.

Task 5: For each state with taxable income, research the applicable corporate income tax rate for that state. Enter the tax rate on the “Apportioned Income & State Tax” tab in the green-highlighted field “Tax Rate. Use the applicable tax rate and taxable income per state previously calculated to calculate the state income taxes. The formula (answer) should be entered into the purple-highlighted “State Taxes” field.

Case variations

Several modifications can be made to the case study, allowing it to be used in different courses/settings and at varying levels of difficulty. For instructors wanting to limit the amount of required research for students, students can be provided the answers to one or all of the required research activities in the case: (1) whether the company’s activities create nexus with a state; (2) each state’s required apportionment formula; and (3) each state’s tax rates. Alternatively, professors can provide students with links to the applicable websites to find this information while still requiring students to find the actual answers.

The case study assumes that all of the company’s taxable income is business income and as such is apportionable to each state. However, if professors want to cover the difference between allocating income and apportioning income, they can add a nonbusiness income element to the case. The case also does not include any information about rental property by state. Instructors may want to add this element for a more thorough discussion of the definition of property used in the business for calculation of the property factor. On the other hand, instructors may want to provide students with the average property by state to reduce the complexity surrounding coverage of the property factor calculation.

For students who already have a solid understanding of nexus and state apportionment, the state taxes overview provided can be removed from the case. Instructors who want to add more writing content to their course can add a writing element to the case. Students could be required to write a memo to the client explaining the concept of nexus and how state apportionment works in general. They could also provide a specific explanation of the client’s state tax situation and its expected state tax liability. Inclusion in the case of a limited number of sales to Rhode Island through an e–commerce website allows instructors to discuss the concept of economic presence. Students’ memos to the client should include an explanation of the nexus issues of remote sellers and how the company’s continued use of e–commerce websites may affect its state income tax exposure.

For professors looking for a more challenging case, the case can be implemented without an Excel template file. For Task 1, students can be provided with three Excel files: one containing the company’s actual sales transactions for the year; one containing the company’s actual payroll records for the year; and one containing the company’s property owned at the beginning and end of the year, including information on rented property. Students would then be required to create pivot tables in the sales and payroll files to determine the company’s sales by state and payroll by state. The property by state would also need to be calculated separately, based on the information provided. The remainder of the case can then be completed by requiring students to create their own spreadsheet for tasks 2–5 above.

Finally, this case provides an excellent opportunity for instructors to invite tax professionals into the classroom. Instructors can invite tax professionals who specialize in multistate tax to introduce the concepts of nexus and state apportionment and discuss their own experiences with these concepts. Alternatively, tax professionals can participate in a debriefing session, discussing the importance of multistate taxation and the relevance of the case to practice.

Gaining confidence and knowledge

As the number of businesses engaging in interstate sales increases, companies will be looking to tax professionals for advice on multistate taxation. Tax professionals with a knowledge of nexus and state apportionment rules can provide a valuable service to clients, identifying how their clients can work within the nexus and state apportionment rules to save tax dollars. This case study provides the opportunity to learn about state corporate income taxes and the concepts of nexus and apportionment.

This case provides students with valuable experience using client information to calculate state apportionment factors and researching tax laws to calculate state–apportioned income and state income tax liabilities. It also allows students to see how Excel is used in practice. Successful completion of the case study should allow students and new staff to gain confidence working with state income taxes and researching nexus and state apportionment laws.

Contributors

Victoria J. Hansen, CPA, Ph.D., is an associate professor of accounting in the Cameron School of Business, University of North Carolina Wilmington, in Wilmington, N.C. Annette Nellen, Esq., CPA, CGMA, is a professor in the Department of Accounting and Finance at San José State University in San José, Calif., and is a past chair of the AICPA Tax Executive Committee. For more information about this column, contact thetaxadviser@aicpa.org.