Amy Hamilton (Tax Analysts): Alternative Apportionment: 2026 Flashpoints

The first half of 2026 produced significant decisions that collectively probe the practical reach and doctrinal boundaries of alternative apportionment and opened new lines of debate this summer at two major state tax conferences.

Four matters in particular illustrate the range of issues now in play, with Smithfield Packaged Meats Corp. v. California Franchise Tax Board being the most closely watched decision.

• In Smithfield, the taxpayer successfully tested whether California’s single-sales-factor regime can be overridden by the state’s alternative apportionment statute when the sales factor produced a roughly 600 percent disparity relative to in-state property and payroll. The superior court said yes, and allowed an equally weighted three-factor formula.
• In Apple Inc. v. Nebraska, both sides proposed adjustments to the sales factor for IRC section 965 repatriation amounts earned over more than a decade but reported on a single 2017 return. The district court rejected the state’s approach and remanded for a new determination, leaving open the outer limit of alternative apportionment for multiyear foreign income.
• In Tractor Supply Co. v. South Carolina Department of Revenue, the South Carolina Court of Appeals upheld the department’s authority to require combined unitary reporting as an alternative method after finding that separate-entity filing with intercompany transfer pricing failed to fairly represent the retailer’s business activity in the state.
• On June 1 the U.S. Supreme Court issued an order in Florida v. California denying Florida’s motion for leave to file a bill of complaint against California over the latter’s treatment of substantial and occasional sales, including capital-gains-type receipts, in the sales factor.

None of the decisions rewrote the constitutional ceiling. Together, however, they examine how far taxpayers and revenue agencies can push statutes modeled on section 18 of the Uniform Division of Income for Tax Purposes Act, whether by petitioning for relief from the standard formula or by imposing an alternative method.

At the FTA conference, Fort said that courts and administrators have long struggled to apply section 18-style provisions, which have no federal counterpart. Revenue agencies commonly invoke that authority to address sales factor inflation and tax-motivated structures, he said, while the Apple and Smithfield decisions raise new questions about the sales factor and single-sales-factor regimes.

“Right now a lot of states are using alternative apportionment to try to figure out what to do with global intangible low-taxed income and net controlled foreign corporation tested income” Fort said. The aim is to head off a constitutional challenge to what taxpayers argue is foreign-derived income, though whether that is an appropriate use of the discretionary authority is an open question.

In Apple v. Nebraska, both sides tried to adjust the apportionment factors for 13 years of repatriation income compressed into a single year. The court rejected both approaches. “Maybe that’s beyond what alternative apportionment can do, but we’ll see,” Fort said.

The persistence of the older “rare and unusual” standard for applying alternative apportionment is now being tested by the widespread adoption of single-sales-factor formulas. The 2026 flashpoint was Smithfield.

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At the MTC conference, Lynn Gandhi of Foley & Lardner said she sees renewed taxpayer interest in alternative apportionment following Smithfield, and from special problems created by capital gains, partnership complexities, and modern businesses that generate multiple streams of income.

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After years in which relief under section 18 felt largely unattainable, Smithfield has raised the possibility that taxpayers can actually succeed in obtaining a different formula, including relief from a pure single-sales-factor regime.

However, Gandhi said the rise of single-sales-factor apportionment adoption by states originated as a business-driven, political initiative. She rejected contemporary arguments that treat the single sales factor as a neutral or inherently appropriate measure of business activity, noting that the formula “had its origins in tax avoidance and tax minimization” rather than any pure theory of fair apportionment, and said it therefore carries no special legitimacy from its current widespread use.