State Income Tax Audits for HNWIs: Resolving Sourcing and Apportionment Issues in California, New York, Texas, Florida, and Washington

Last Updated: October 5, 2026

Next Scheduled Review: October 2027

Key Takeaways

California uses a single sales factor apportionment formula for business income, sourcing sales of services and intangibles under market-based rules effective January 1, 2026, per Cal. Code Regs. tit. 18, § 25136-2 .
New York sources nonresident income under N.Y. Tax Law § 631, with approximately 300 auditors dedicated to residency audits and roughly 3,000 audits per year from 2013 to 2017 collecting $1 billion in tax revenue .
Texas imposes no personal income tax but apportions franchise tax using a single-factor gross receipts formula under Tex. Tax Code § 171.106, which applies to business income derived from Texas sources .
Florida apportions corporate income using a three-factor formula with double-weighted sales (50% sales, 25% property, 25% payroll) under Fla. Stat. § 220.15, and continues to apply cost-of-performance sourcing in audits despite adverse court rulings .
Washington imposes a 7% capital gains excise tax under RCW 82.87 on gains exceeding $250,000, allocated to Washington for intangible personal property if the taxpayer was domiciled in the state, with a 9.9% tier taking effect January 1, 2028, under ESSB 6346 .

Direct answer: A state income tax audit for high-net-worth individuals involves the examination of income sourcing and apportionment determinations under state-specific statutory frameworks, including California’s single sales factor with market-based sourcing under Cal. Code Regs. tit. 18, § 25136-2, New York’s allocation rules under N.Y. Tax Law § 631, Texas’s franchise tax apportionment under Tex. Tax Code § 171.106, Florida’s three-factor formula under Fla. Stat. § 220.15, and Washington’s capital gains excise tax under RCW 82.87.

Cite This Article

Goldstein, A. (2026). State Income Tax Audits for HNWIs: Resolving Sourcing and Apportionment Issues in California, New York, Texas, Florida, and Washington. [Publication Name].

Alan Goldstein, “State Income Tax Audits for HNWIs: Resolving Sourcing and Apportionment Issues in California, New York, Texas, Florida, and Washington,” [Publication Name] (Oct. 5, 2026).

Introduction

High-net-worth individuals with multistate business interests, pass-through entity income, and investment portfolios face increasing audit scrutiny from state taxing authorities on sourcing and apportionment determinations. California and New York impose the highest state income tax burdens in the nation and maintain the most aggressive audit programs, while Texas, Florida, and Washington—states with no personal income tax—present unique sourcing issues through franchise tax, corporate income tax, and capital gains excise tax regimes. The controlling authorities are state-specific: California operates under Cal. Rev. & Tax. Code and Cal. Code Regs. tit. 18, New York under N.Y. Tax Law and 20 NYCRR, Texas under Tex. Tax Code Chapter 171, Florida under Fla. Stat. Chapter 220, and Washington under RCW Chapter 82.87. Federal constitutional limits under the Due Process and Commerce Clauses constrain state taxing authority, but the operative sourcing and apportionment rules are creatures of state law.

What Are State Income Tax Sourcing and Apportionment Audits?

Direct answer: A state income tax sourcing and apportionment audit is an examination by a state taxing authority to verify whether a taxpayer correctly determined the portion of income subject to tax in that state under its apportionment formula, which may be a single sales factor (California, Texas), a three-factor formula (Florida), or income allocation rules (New York, Washington), as codified in the respective state’s revenue statutes.

Statutory Basis

Direct answer: California’s apportionment rules are codified in Cal. Rev. & Tax. Code § 25128 et seq. and Cal. Code Regs. tit. 18, § 25136-2, effective January 1, 2026. New York’s nonresident sourcing rules are in N.Y. Tax Law § 631 and 20 NYCRR Part 132. Texas’s franchise tax apportionment is in Tex. Tax Code § 171.106. Florida’s apportionment is in Fla. Stat. § 220.15. Washington’s capital gains allocation is in RCW 82.87.100.

California uses a single sales factor formula under Cal. Rev. & Tax. Code § 25128.5, with market-based sourcing rules for services and intangibles finalized in Cal. Code Regs. tit. 18, § 25136-2, effective for tax years beginning on or after January 1, 2026 . New York sources nonresident income under N.Y. Tax Law § 631, which lists categories of income and assigns each a sourcing rule; the Nonresident Audit Guidelines (revised December 2021) govern audit procedures . Texas apportions franchise tax using a single-factor gross receipts formula under Tex. Tax Code § 171.106, multiplying total margin by the ratio of Texas gross receipts to total gross receipts everywhere . Florida apportions corporate income using a three-factor formula (25% property, 25% payroll, 50% sales) under Fla. Stat. § 220.15 . Washington allocates long-term capital gains to Washington under RCW 82.87.100, with intangible personal property gains allocated to Washington if the taxpayer was domiciled in the state .

Historical Development

Direct answer: California transitioned to mandatory single sales factor apportionment in 2013 and finalized market-based sourcing regulations effective January 1, 2026. New York revised its Nonresident Audit Guidelines in December 2021. Texas enacted its current franchise tax margin tax in 2006. Florida’s three-factor formula traces to its original corporate income tax. Washington enacted its capital gains excise tax in 2021 under SB 5096.

California adopted mandatory single sales factor apportionment for most businesses in 2013, eliminating the three-factor formula. The FTB finalized amendments to Cal. Code Regs. tit. 18, § 25136-2 in September 2025, effective for tax years beginning on or after January 1, 2026, simplifying sourcing for service professionals to the client’s billing address . New York revised its Nonresident Audit Guidelines in December 2021, providing updated guidance to Tax Department staff conducting nonresident audits . Texas enacted its current franchise tax margin tax in 2006, replacing the earned surplus tax, with a single-factor apportionment formula based on gross receipts . Florida has required three-factor, double-weighted sales apportionment since its corporate income tax was enacted. Washington enacted its 7% capital gains excise tax in 2021 under SB 5096, effective January 1, 2022, with a 9.9% tier for gains exceeding $1 million added by SB 5813 in May 2025 .

Current Scope

Direct answer: The current scope of sourcing and apportionment audits varies by state: California’s FTB identifies apportionment and allocation of income as a common audit issue. New York conducts approximately 3,000 residency audits per year. Texas apportions franchise tax to Texas based on Texas gross receipts. Florida’s Department of Revenue continues to apply market-based sourcing in audits despite adverse court rulings. Washington’s capital gains tax applies to gains exceeding $250,000.

California‘s FTB has specifically identified apportionment and allocation of income as a common business-entity audit issue, with the state applying market-based sourcing rules to many sales of services and intangible property . New York has approximately 300 auditors dedicated to residency audits, conducting roughly 3,000 audits per year from 2013 to 2017, collecting $1 billion** in tax revenue . **Texas** apportions franchise tax to Texas based on Texas gross receipts divided by total gross receipts everywhere . **Florida**’s Department of Revenue continues to apply market-based sourcing in audits and assessments despite circuit court rulings upholding cost-of-performance sourcing . **Washington**’s capital gains tax applies to individuals with annual Washington capital gains exceeding **$250,000, with a 7% rate up to $1 million and 9.9% above $1 million beginning January 1, 2028 .

Entity Reference Table

Entity	Full Name	Type	Binding Effect	Role in This Article
FTB	California Franchise Tax Board	State administrative agency	Binds California taxpayers; persuasive in CA courts	Administers California apportionment and sourcing audits
NYS DTF	New York State Department of Taxation and Finance	State administrative agency	Binds New York taxpayers; persuasive in NY courts	Administers New York sourcing and residency audits
TX Comptroller	Texas Comptroller of Public Accounts	State administrative agency	Binds Texas franchise taxpayers; persuasive in TX courts	Administers Texas franchise tax apportionment
FL DOR	Florida Department of Revenue	State administrative agency	Binds Florida corporate taxpayers; persuasive in FL courts	Administers Florida apportionment audits
WA DOR	Washington State Department of Revenue	State administrative agency	Binds Washington taxpayers; persuasive in WA courts	Administers Washington capital gains excise tax
CA OTA	California Office of Tax Appeals	State tribunal	Binds FTB on remand; persuasive in CA courts	Hears California tax appeals
NY DTA	New York State Division of Tax Appeals	State tribunal	Binds NYS DTF on remand; persuasive in NY courts	Hears New York tax appeals
NY Tax Appeals Tribunal	New York State Tax Appeals Tribunal	State appellate tribunal	Binds NYS DTF and NY DTA; persuasive in NY courts	Reviews NY DTA decisions
U.S. Constitution	United States Constitution	Federal constitutional authority	Binds all state taxing authorities	Limits state taxation under Due Process and Commerce Clauses

Binding Effect and Legal Weight

Direct answer: State apportionment statutes such as Cal. Rev. & Tax. Code § 25128.5, N.Y. Tax Law § 631, Tex. Tax Code § 171.106, Fla. Stat. § 220.15, and RCW 82.87.100 are primary authority binding on taxpayers and state agencies. State regulations are primary authority binding on issuing agencies but subject to judicial review. State tribunal decisions are binding on agencies but persuasive only in state courts.

Who Is Bound

Direct answer: California’s apportionment statutes and regulations bind the FTB and all California taxpayers. New York’s sourcing rules bind the NYS DTF and all New York taxpayers. Texas’s franchise tax apportionment binds the Comptroller and all taxable entities. Florida’s apportionment binds the DOR and all corporate taxpayers. Washington’s capital gains tax binds the DOR and all individuals with Washington capital gains exceeding $250,000.

California‘s Cal. Rev. & Tax. Code § 25128.5 and Cal. Code Regs. tit. 18, § 25136-2 bind the FTB and all California taxpayers. New York‘s N.Y. Tax Law § 631 binds the NYS DTF and all New York taxpayers, with the Nonresident Audit Guidelines governing audit procedures . Texas‘s Tex. Tax Code § 171.106 binds the Comptroller and all taxable entities, with Section 171.109 providing an E-Z computation election for entities with not more than $20 million in total revenue . Florida‘s Fla. Stat. § 220.15 binds the DOR and all corporate taxpayers, with the three-factor formula measuring Florida’s share of adjusted federal income . Washington‘s RCW 82.87.100 binds the DOR and all individuals with Washington capital gains, with a credit allowed for taxes paid to other taxing jurisdictions .

Precedential Value

Direct answer: California Office of Tax Appeals decisions designated as precedential under Cal. Rev. & Tax. Code § 15676.5 are binding on the FTB. New York Tax Appeals Tribunal decisions are binding on the NYS DTF and Division of Tax Appeals but persuasive only in New York courts. Texas Comptroller hearings are persuasive but not binding precedent. Florida circuit court decisions are binding on the DOR within the circuit.

California‘s OTA issues precedential decisions binding on the FTB under Cal. Rev. & Tax. Code § 15676.5. New York‘s Tax Appeals Tribunal decisions are binding on the NYS DTF and the Division of Tax Appeals under N.Y. Tax Law § 2016 . Texas Comptroller hearings provide persuasive guidance but are not binding precedent. Florida circuit court decisions, such as the March 6, 2026 ruling in Checkfree Services Corporation, are binding on the DOR within that circuit but may be appealed . Washington‘s Board of Tax Appeals and courts provide review of DOR determinations.

Primary vs. Secondary Authority

Direct answer: State revenue statutes and regulations are primary authority. State tribunal and court decisions are primary authority as adjudications. State agency publications, audit guidelines, and advisory opinions are secondary authority, persuasive in audits but not binding on courts.

Cal. Rev. & Tax. Code § 25128.5 and Cal. Code Regs. tit. 18, § 25136-2 are primary authority . N.Y. Tax Law § 631 and 20 NYCRR Part 132 are primary authority. Tex. Tax Code § 171.106 is primary authority . Fla. Stat. § 220.15 is primary authority . RCW 82.87.100 is primary authority . The New York Nonresident Audit Guidelines and FTB audit manuals are secondary authority . FTB Legal Ruling No. 375 and similar administrative rulings are persuasive but not binding on courts.

Key Authorities and Cases

Direct answer: The controlling authorities for sourcing and apportionment audits vary by state: California’s Cal. Rev. & Tax. Code § 25128.5 and Cal. Code Regs. tit. 18, § 25136-2; New York’s N.Y. Tax Law § 631 and the Nonresident Audit Guidelines; Texas’s Tex. Tax Code § 171.106; Florida’s Fla. Stat. § 220.15; and Washington’s RCW 82.87.100.

California Statutory Authority

Cal. Rev. & Tax. Code § 25128.5 mandates single sales factor apportionment for most businesses. Cal. Rev. & Tax. Code § 25136-2 (codified at Cal. Code Regs. tit. 18, § 25136-2) provides market-based sourcing rules for sales of services and intangibles, effective for tax years beginning on or after January 1, 2026 . The revised rules simplify sourcing for service professionals to the client’s billing address . Cal. Rev. & Tax. Code § 23101 establishes bright-line nexus standards, including California sales exceeding the lesser of $500,000 or 25% of total taxpayer sales .

New York Statutory Authority

N.Y. Tax Law § 631 lists categories of income and assigns each a sourcing rule for nonresidents . N.Y. Tax Law § 632(a)(2) requires nonresident and part-year resident shareholders of New York S corporations to use the business apportionment factor to determine New York source income . The Nonresident Audit Guidelines (December 2021) govern audit procedures, examining domicile, statutory residency, and income allocation .

Texas Statutory Authority

Tex. Tax Code § 171.106 provides that a taxable entity’s margin is apportioned to Texas by multiplying the margin by a fraction, the numerator of which is the taxpayer’s gross receipts from business done in Texas and the denominator of which is the taxpayer’s gross receipts from its entire business . Section 171.109 allows a taxable entity with not more than $20 million in total revenue to elect the E-Z computation, multiplying total revenue by the apportionment factor and then by a tax rate of 0.00331 .

Florida Statutory Authority

Fla. Stat. § 220.15 requires corporations to apportion business income using a three-factor formula composed of a sales factor representing 50% of the fraction, a property factor representing 25%, and a payroll factor representing 25% . For the sales factor, Rule 12C-1.0155, F.A.C. identifies eleven specific categories of income and a “catch-all” category . The Checkfree Services Corporation decision (Fla. Cir. Ct. Mar. 6, 2026) held that the cost-of-performance method applies to service revenue sourcing, consistent with express language in the state’s COP rule .

Washington Statutory Authority

RCW 82.87.100 provides that long-term capital gains and losses are allocated to Washington for intangible personal property if the taxpayer was domiciled in Washington . A credit is allowed against the tax for legally imposed income or excise tax paid to another taxing jurisdiction on capital gains derived from capital assets within that jurisdiction . SB 5096 (2021) enacted the 7% tax on gains exceeding $250,000**, and **SB 5813** (May 2025) added a **2.9%** tier for a total of **9.9%** on gains exceeding **$1 million .

Summary Table of Authorities

Authority	Full Citation	Type	Jurisdiction	Key Holding
California Single Sales Factor	Cal. Rev. & Tax. Code § 25128.5	Statute	California	Mandates single sales factor apportionment
California Market-Based Sourcing	Cal. Code Regs. tit. 18, § 25136-2	Regulation	California	Market-based sourcing for services and intangibles, effective 2026
New York Nonresident Sourcing	N.Y. Tax Law § 631	Statute	New York	Lists categories of income and sourcing rules
New York Audit Guidelines	Nonresident Audit Guidelines (Dec. 2021)	Agency guidance	New York	Governs audit procedures for domicile, residency, allocation
Texas Franchise Tax Apportionment	Tex. Tax Code § 171.106	Statute	Texas	Single-factor gross receipts formula
Texas E-Z Computation	Tex. Tax Code § 171.109	Statute	Texas	E-Z computation for entities with ≤ $20M revenue
Florida Apportionment	Fla. Stat. § 220.15	Statute	Florida	Three-factor formula with double-weighted sales
Florida COP Sourcing	Checkfree Services Corp. v. Fla. Dep’t of Revenue (Fla. Cir. Ct. Mar. 6, 2026)	Case	Florida	COP method applies to service revenue sourcing
Washington Capital Gains	RCW 82.87.100	Statute	Washington	Allocation rules and credit for taxes paid
Washington 9.9% Tier	SB 5813 (2025)	Legislation	Washington	Adds 2.9% tier, total 9.9% above $1M

Practical Application in Tax Practice

Direct answer: In practice, California, New York, Texas, Florida, and Washington sourcing and apportionment audits require taxpayers to produce contemporaneous records supporting their apportionment formulas, including sales records, payroll data, property records, and travel documentation. Each state applies its own formula, and taxpayers must demonstrate compliance with the specific statutory requirements of each jurisdiction.

Research

Direct answer: Researching California sourcing requires consulting Cal. Rev. & Tax. Code § 25128.5, Cal. Code Regs. tit. 18, § 25136-2, and FTB publications. Researching New York requires N.Y. Tax Law § 631 and the Nonresident Audit Guidelines. Texas research requires Tex. Tax Code § 171.106 and Comptroller rules. Florida research requires Fla. Stat. § 220.15 and Rule 12C-1.0155. Washington research requires RCW 82.87.100 and DOR guidance.

Start with the applicable apportionment statute for each state. For California, consult Cal. Rev. & Tax. Code § 25128.5 and the finalized Cal. Code Regs. tit. 18, § 25136-2 . For New York, consult N.Y. Tax Law § 631 and the Nonresident Audit Guidelines (Dec. 2021) . For Texas, consult Tex. Tax Code § 171.106 and Comptroller Rule 3.591 . For Florida, consult Fla. Stat. § 220.15 and Rule 12C-1.0155, F.A.C. . For Washington, consult RCW 82.87.100 and DOR interim guidance .

Audit

Direct answer: A California FTB apportionment audit examines the taxpayer’s sales sourcing under market-based rules. A New York nonresident audit examines domicile, statutory residency, and income allocation. A Texas franchise tax audit examines gross receipts sourcing and the single-factor formula. A Florida corporate income tax audit examines the three-factor formula and COP sourcing. A Washington capital gains audit examines domicile and allocation of gains.

The FTB has identified apportionment and allocation of income as a common audit issue, focusing on market-based sourcing for services and intangibles . The NYS DTF conducts approximately 3,000 residency audits per year, examining domicile, statutory residency, and income allocation under the Nonresident Audit Guidelines . The Texas Comptroller audits franchise tax apportionment, examining gross receipts sourcing under Tex. Tax Code § 171.106 . The Florida DOR audits corporate income tax apportionment, applying the three-factor formula and continuing to apply market-based sourcing in audits despite adverse court rulings . The Washington DOR audits capital gains excise tax returns, examining domicile and allocation of gains under RCW 82.87.100 .

Appeals

Direct answer: In California, a taxpayer may appeal an FTB determination to the Office of Tax Appeals under Cal. Rev. & Tax. Code § 15670. In New York, a taxpayer may file a petition with the Division of Tax Appeals within 90 days of the Notice of Deficiency. In Texas, a taxpayer may request a redetermination hearing with the Comptroller. In Florida, a taxpayer may protest a DOR assessment and request an administrative hearing. In Washington, a taxpayer may appeal to the Board of Tax Appeals.

California‘s OTA appeal process begins with filing a Petition for Administrative Hearing within 30 days of the FTB’s Notice of Action under Cal. Rev. & Tax. Code § 15670. New York‘s DTA process begins with filing a Petition within 90 days of the Notice of Deficiency under 20 NYCRR § 3000.3; the Administrative Law Judge issues a determination appealable to the Tax Appeals Tribunal under N.Y. Tax Law § 2006 . Texas taxpayers may request a redetermination hearing with the Comptroller under Tex. Tax Code § 111.009. Florida taxpayers may protest a DOR assessment and request an administrative hearing under Fla. Stat. § 72.011. Washington taxpayers may appeal to the Board of Tax Appeals under RCW 82.03.

Litigation

Direct answer: In California, OTA decisions may be appealed to the California Superior Court and then to the Courts of Appeal under Cal. Rev. & Tax. Code § 15679. In New York, Tax Appeals Tribunal decisions may be reviewed by the Appellate Division under N.Y. Tax Law § 2016. In Texas, suits must be filed in district court. In Florida, taxpayers may file suit in circuit court. In Washington, appeals may be taken to superior court.

Judicial review of California OTA decisions is governed by Cal. Rev. & Tax. Code § 15679, with the Superior Court reviewing the administrative record. New York Tribunal decisions are reviewed by the Appellate Division under N.Y. Tax Law § 2016 and Article 78 of the CPLR . Texas franchise tax disputes are litigated in district court in Travis County or the taxpayer’s county of residence. Florida corporate income tax disputes may be filed in circuit court, as in the Checkfree Services Corporation case . Washington appeals from the Board of Tax Appeals may be taken to superior court under RCW 82.03.180.

Planning Strategies

Direct answer: HNWIs with multistate income should consider five primary planning strategies: (1) maintaining contemporaneous records of sales, payroll, and property by state; (2) structuring entities to align with favorable apportionment formulas; (3) documenting the business purpose of interstate activities; (4) considering the impact of market-based sourcing on service income; and (5) coordinating state tax positions to avoid double taxation.

Key planning strategies include: (1) Maintain contemporaneous records of sales by state, payroll by state, and property by state to support apportionment formula calculations. (2) Structure entities to align with favorable apportionment formulas—for example, California’s single sales factor benefits businesses with significant in-state sales but low in-state payroll and property . (3) Document the business purpose of interstate activities to support sourcing determinations. (4) Consider the impact of market-based sourcing on service income, particularly in California where the revised rules simplify sourcing to the client’s billing address . (5) Coordinate state tax positions to avoid double taxation, including claiming credits for taxes paid to other states under RCW 82.87.100 and similar provisions .

Interaction with Other Authorities

Direct answer: State apportionment statutes control over inconsistent agency guidance and form instructions. Federal constitutional limits under the Due Process and Commerce Clauses constrain state taxing authority but do not preempt state apportionment rules that are rationally related to a legitimate state interest. Federal tax law is relevant only where state law specifically conforms to IRC provisions.

Higher Authority

Direct answer: The U.S. Constitution is the highest authority, followed by state constitutions and state revenue statutes. The Due Process Clause requires a minimum connection between the state and the taxpayer before the state may impose an income tax, and the Commerce Clause prohibits state taxes that discriminate against or unduly burden interstate commerce.

Under the Due Process Clause, a state may tax an individual’s income only if the individual has sufficient minimum contacts with the state. The Commerce Clause prohibits state taxes that discriminate against interstate commerce or impose undue burdens on it. State apportionment formulas that apply evenhandedly to in-state and out-of-state taxpayers are generally upheld.

Lower Authority

Direct answer: State agency audit guidelines, form instructions, and publications are lower authority than state revenue statutes. The New York Nonresident Audit Guidelines and FTB audit manuals are persuasive but not binding on courts. Administrative rulings such as FTB Legal Ruling No. 375 are persuasive but not binding on courts.

The New York Nonresident Audit Guidelines provide guidance to Tax Department staff but are not binding on courts . FTB publications and audit manuals provide agency interpretation but lack the force of law. Texas Comptroller rules are binding on the Comptroller but subject to judicial review. Florida DOR rules are binding on the DOR but subject to challenge, as demonstrated by the Checkfree decision .

Conflict Resolution

Direct answer: When a state agency’s audit guidance conflicts with a state revenue statute, the statute controls. When a state agency’s interpretation conflicts with a court decision, the court decision controls. When federal constitutional requirements conflict with state apportionment rules, the constitutional requirement controls.

The resolution rule is that legislative enactments supersede administrative rules and guidance. Cal. Rev. & Tax. Code § 25128.5 controls over any inconsistent FTB guidance. N.Y. Tax Law § 631 controls over any inconsistent NYS DTF publication. Tex. Tax Code § 171.106 controls over any inconsistent Comptroller rule. Fla. Stat. § 220.15 controls over any inconsistent DOR rule, as confirmed by the Checkfree decision . RCW 82.87.100 controls over any inconsistent DOR guidance.

Sunset and Transition Rules

Direct answer: California’s market-based sourcing regulations are effective for tax years beginning on or after January 1, 2026. New York’s Nonresident Audit Guidelines were revised in December 2021. Texas’s franchise tax has no scheduled sunset. Florida’s apportionment formula has no scheduled sunset. Washington’s 9.9% capital gains tax tier takes effect January 1, 2028.

California‘s amended Cal. Code Regs. tit. 18, § 25136-2 is effective for tax years beginning on or after January 1, 2026 . New York‘s Nonresident Audit Guidelines were revised in December 2021 . Texas‘s franchise tax has no scheduled sunset. Florida‘s apportionment formula under Fla. Stat. § 220.15 has no scheduled sunset. Washington‘s SB 5813 added a 2.9% tier for a total of 9.9% on gains exceeding $1 million, effective January 1, 2028 .

Common Errors and Pitfalls

Assuming single sales factor applies uniformly. California uses a single sales factor for most businesses, but some industries may use different formulas. Texas uses a single gross receipts factor. Verify the applicable formula before filing.
Failing to track sales by state for market-based sourcing. California’s market-based sourcing rules effective January 1, 2026, require sourcing services to the client’s billing address . Taxpayers who fail to track client locations risk misapportionment.
Ignoring the E-Z computation election in Texas. Texas allows entities with not more than $20 million in total revenue to elect the E-Z computation under Tex. Tax Code § 171.109 . Failing to consider this election may result in overpayment.
Overlooking the credit for taxes paid to other states. Washington allows a credit against the capital gains tax for taxes paid to other taxing jurisdictions under RCW 82.87.100 . Failing to claim this credit results in double taxation.
Not documenting the income-producing activity for Florida COP sourcing. Florida continues to apply cost-of-performance sourcing in audits despite adverse court rulings . Taxpayers must document where income-producing activities occur to support their sourcing position.
Underestimating New York’s audit intensity. New York has approximately 300 auditors dedicated to residency audits, conducting roughly 3,000 audits per year . Taxpayers claiming nonresident status should maintain comprehensive records of days spent in New York.
Failing to consider Washington’s domicile-based allocation for intangibles. Washington allocates long-term capital gains from intangible personal property to Washington if the taxpayer was domiciled in Washington . Taxpayers who change domicile must ensure they meet the statutory requirements.

What This Article Does Not Cover

Residency and domicile audits. This article addresses sourcing and apportionment of income, not the separate question of whether a taxpayer is a resident or domiciliary of a state. Residency audits are covered in separate articles.
Sales and use tax. State sales and use tax sourcing rules are distinct from income tax apportionment and are beyond the scope of this article.
Property tax. State and local property tax assessments are separate from income tax apportionment.
Credits and incentives. State-specific tax credits and incentives that may reduce apportioned tax liability are not addressed.
Federal income tax sourcing. Federal income tax sourcing rules under IRC § 861 et seq. are distinct from state apportionment rules.
Criminal tax evasion. This article addresses civil sourcing and apportionment audits, not criminal investigations.

How to Verify This Article

Primary sources for verification:

California Franchise Tax Board: Cal. Rev. & Tax. Code § 25128.5, Cal. Code Regs. tit. 18, § 25136-2, FTB Publication 1061, available at FTB.ca.gov.
New York State Department of Taxation and Finance: N.Y. Tax Law § 631, Nonresident Audit Guidelines (Dec. 2021), available at tax.ny.gov.
Texas Comptroller of Public Accounts: Tex. Tax Code §§ 171.106, 171.109, Comptroller Rule 3.591, available at comptroller.texas.gov.
Florida Department of Revenue: Fla. Stat. § 220.15, Rule 12C-1.0155, F.A.C., available at floridarevenue.com.
Washington State Department of Revenue: RCW 82.87.100, SB 5096 (2021), SB 5813 (2025), available at dor.wa.gov.
Cornell Legal Information Institute: State statutes and regulations available at law.cornell.edu.

Query Fan-Out Answer Map

Fan-Out Question	Answered In	Answer Unit (verbatim)
What is apportionment for state income tax?	H2: What Are State Income Tax Sourcing and Apportionment Audits? > H3: Statutory Basis	California’s apportionment rules are codified in Cal. Rev. & Tax. Code § 25128 et seq. and Cal. Code Regs. tit. 18, § 25136-2, effective January 1, 2026. New York’s nonresident sourcing rules are in N.Y. Tax Law § 631 and 20 NYCRR Part 132. Texas’s franchise tax apportionment is in Tex. Tax Code § 171.106.
What is California’s apportionment formula?	H2: Key Authorities and Cases > H3: California Statutory Authority	Cal. Rev. & Tax. Code § 25128.5 mandates single sales factor apportionment for most businesses. Cal. Code Regs. tit. 18, § 25136-2 provides market-based sourcing rules for sales of services and intangibles, effective for tax years beginning on or after January 1, 2026.
What is New York’s sourcing rule for nonresidents?	H2: Key Authorities and Cases > H3: New York Statutory Authority	N.Y. Tax Law § 631 lists categories of income and assigns each a sourcing rule for nonresidents. N.Y. Tax Law § 632(a)(2) requires nonresident and part-year resident shareholders of New York S corporations to use the business apportionment factor.
What is Texas’s franchise tax apportionment formula?	H2: Key Authorities and Cases > H3: Texas Statutory Authority	Tex. Tax Code § 171.106 provides that a taxable entity’s margin is apportioned to Texas by multiplying the margin by a fraction, the numerator of which is the taxpayer’s gross receipts from business done in Texas and the denominator of which is the taxpayer’s gross receipts from its entire business.
What is Florida’s apportionment formula?	H2: Key Authorities and Cases > H3: Florida Statutory Authority	Fla. Stat. § 220.15 requires corporations to apportion business income using a three-factor formula composed of a sales factor representing 50% of the fraction, a property factor representing 25%, and a payroll factor representing 25%.
What is Washington’s capital gains tax rate?	H2: Key Authorities and Cases > H3: Washington Statutory Authority	SB 5096 (2021) enacted the 7% tax on gains exceeding $250,000, and SB 5813 (May 2025) added a 2.9% tier for a total of 9.9% on gains exceeding $1 million.
How does California source service income?	H2: Key Authorities and Cases > H3: California Statutory Authority	The revised rules simplify sourcing for service professionals to the client’s billing address.
How many auditors does New York have for residency audits?	H2: What Are State Income Tax Sourcing and Apportionment Audits? > H3: Current Scope	New York has approximately 300 auditors dedicated to residency audits, conducting roughly 3,000 audits per year from 2013 to 2017, collecting $1 billion in tax revenue.
Can I elect the E-Z computation in Texas?	H2: Common Errors and Pitfalls	Texas allows entities with not more than $20 million in total revenue to elect the E-Z computation under Tex. Tax Code § 171.109.
Is there a credit for taxes paid to other states in Washington?	H2: Common Errors and Pitfalls	Washington allows a credit against the capital gains tax for taxes paid to other taxing jurisdictions under RCW 82.87.100.
How do I appeal a California apportionment determination?	H2: Practical Application in Tax Practice > H3: Appeals	California’s OTA appeal process begins with filing a Petition for Administrative Hearing within 30 days of the FTB’s Notice of Action under Cal. Rev. & Tax. Code § 15670.
How do I appeal a New York sourcing determination?	H2: Practical Application in Tax Practice > H3: Appeals	New York’s DTA process begins with filing a Petition within 90 days of the Notice of Deficiency under 20 NYCRR § 3000.3.
Did California’s sourcing rules change in 2026?	H2: Interaction with Other Authorities > H3: Sunset and Transition Rules	California’s amended Cal. Code Regs. tit. 18, § 25136-2 is effective for tax years beginning on or after January 1, 2026.
What records do I need for a Florida apportionment audit?	H2: Practical Application in Tax Practice > H3: Audit	Florida taxpayers must document where income-producing activities occur to support their sourcing position, as the DOR continues to apply cost-of-performance sourcing in audits.
How does Washington allocate capital gains on intangibles?	H2: Key Authorities and Cases > H3: Washington Statutory Authority	Washington allocates long-term capital gains from intangible personal property to Washington if the taxpayer was domiciled in Washington.

Frequently Asked Questions

What is California’s apportionment formula for 2026?

Direct answer: California uses a single sales factor apportionment formula under Cal. Rev. & Tax. Code § 25128.5, meaning the California formula for determining state taxable business income is sales sourced to California divided by all sales. Effective January 1, 2026, market-based sourcing rules under Cal. Code Regs. tit. 18, § 25136-2 simplify sourcing for service professionals to the client’s billing address.

What is New York’s sourcing rule for nonresident income?

Direct answer: New York sources nonresident income under N.Y. Tax Law § 631, which lists categories of income and assigns each a sourcing rule. The Nonresident Audit Guidelines (revised December 2021) govern audit procedures, examining domicile, statutory residency, and income allocation. New York has approximately 300 auditors dedicated to residency audits, conducting roughly 3,000 audits per year.

What is Texas’s franchise tax apportionment formula?

Direct answer: Texas apportions franchise tax using a single-factor gross receipts formula under Tex. Tax Code § 171.106, multiplying total margin by the ratio of Texas gross receipts to total gross receipts everywhere. Entities with not more than $20 million in total revenue may elect the E-Z computation under Tex. Tax Code § 171.109.

What is Florida’s apportionment formula for corporate income tax?

Direct answer: Florida apportions corporate income using a three-factor formula under Fla. Stat. § 220.15, with a sales factor representing 50% of the fraction, a property factor representing 25%, and a payroll factor representing 25%. The Florida DOR continues to apply cost-of-performance sourcing in audits despite circuit court rulings upholding COP sourcing.

What is Washington’s capital gains tax rate?

Direct answer: Washington imposes a 7% capital gains excise tax under RCW 82.87 on gains exceeding $250,000, with a 9.9% tier taking effect January 1, 2028, under SB 5813 for gains exceeding $1 million. A credit is allowed for taxes paid to other taxing jurisdictions on the same gains under RCW 82.87.100.

How do I appeal a state apportionment determination?

Direct answer: In California, a taxpayer may appeal an FTB determination to the Office of Tax Appeals within 30 days of the Notice of Action under Cal. Rev. & Tax. Code § 15670. In New York, a taxpayer may file a Petition with the Division of Tax Appeals within 90 days of the Notice of Deficiency under 20 NYCRR § 3000.3. Texas taxpayers may request a redetermination hearing with the Comptroller, and Florida taxpayers may protest a DOR assessment.

Conclusion

State income tax sourcing and apportionment audits for high-net-worth individuals present unique challenges across California, New York, Texas, Florida, and Washington. Each state applies its own apportionment formula—California and Texas use single sales factor formulas, Florida uses a three-factor formula with double-weighted sales, New York sources nonresident income under statutory categories, and Washington imposes a capital gains excise tax with domicile-based allocation. The controlling authorities are state-specific revenue statutes and regulations, and the burden of proof rests on the taxpayer. Successful navigation requires contemporaneous records of sales, payroll, property, and travel by state, awareness of each state’s unique sourcing rules, and a comprehensive strategy for documenting apportionment positions. California’s market-based sourcing regulations effective January 1, 2026, represent a significant development that simplifies sourcing for service professionals while expanding nexus for asset managers. New York’s approximately 300 residency auditors and roughly 3,000 annual audits underscore the state’s aggressive enforcement posture. Texas’s single-factor gross receipts formula and E-Z computation election provide planning opportunities for smaller entities. Florida’s continued application of cost-of-performance sourcing in audits creates uncertainty despite adverse court rulings. Washington’s 9.9% capital gains tax tier effective January 1, 2028, creates urgent planning imperatives for high-net-worth individuals with significant appreciated assets.

Author Bio

Alan Goldstein is an Enrolled Agent and researcher with 26 years of experience in federal and state tax controversy. He advises high-net-worth families and closely held businesses on income-shifting strategies, charitable planning, and IRS audit defense.

Author sameAs: [LinkedIn URL], [Professional Profile URL], [Published Works URL]

Last Updated: October 5, 2026

Next Scheduled Review: October 2027

THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. THE INFORMATION MAY BE OUTDATED AND YOU ARE NOT TO RELY ON IT. CONTACT YOUR PROFESSIONAL TO GUIDE YOU BASED ON YOUR CURRENT SITUATION, OR WHAT MAY APPLY TO PREVIOUS YEARS. THIS ARTICLE IS ONLY MEANT TO PROVIDE GENERAL INFORMATION AND NOT A SPECIFIC ANSWER. YOU ARE NOT OUR CLIENT AND WE HAVE NOT ADVISED YOU.

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Author: agoldstein