Do receipts no state can source leave the denominator, go to commercial domicile, or dilute every state's factor?

Where unsourced receipts come from in a tiered partnership

The fact pattern is an operating partnership, a Delaware LLC taxed as a partnership that holds an investment management group's assets. Its partners are the REIT partner (a real estate investment trust holding about 90 percent), the management corporation (a C corporation holding about 5 percent), and the executive partnership (an upper tier through which senior executives hold the rest). Below it, through lower-tier LLCs and LPs, sit real estate in several states, loans secured by real estate, interests in investment funds that themselves hold real estate and operating businesses, and a few wholly owned taxable subsidiaries. In the year at issue it has receipts of about $400 million from rents, interest, fund distributions and management-related income, and it sells a lower-tier operating platform, held through an LLC taxed as a partnership, for a gain of about $900 million, larger than all of its other receipts combined. It files partnership returns in about 30 states and withholds or pays composite tax for its partners where required.

Unsourced receipts reach the receipts factor (the statutes call it the sales factor) from two directions. The first is missing information: a fund's K-1 reports a gain with no state detail, or a loan file arrives without collateral locations. The second is the rule itself: the state's sourcing rule assigns the receipt to a place where the partnership does not file, excludes the receipt type, or runs out of steps. The two look alike in a workpaper and differ in law. A statute that excludes a receipt only when its location "cannot be determined or reasonably approximated" does not reach a receipt whose location could be approximated from information the partnership did not gather.

From any one state's side, "unsourced" is not a category. Each state asks whether a receipt enters the factor, at gross or net, whether it belongs in that state's numerator, and, if the state's rule cannot place it, whether it stays in that state's denominator. A column labelled "not sourced" answers the last question once for 30 states.

The answer does not stay at the partnership. In a flow-up state the partnership's factors are combined with a corporate partner's own: California, for example, combines a unitary corporate partner's share of the partnership's business with the partner's own business, includes the partnership's sales in the partner's denominator "to the extent of the taxpayer's interest in the partnership," and measures that interest by the partner's interest in profits (Cal. Code Regs., tit. 18, section 25137-1(a), (f)(3)(A), (f)(4)). The REIT partner and the management corporation inherit whatever the partnership's tool did, and so do the nonresident withholding and composite returns computed for the executives. The state rules below are stated as each state's statute or regulation states them; whether a state applies a given rule to the partnership's own return, to a corporate partner's combined factors, or to both is a question each state answers separately.

The arithmetic of the possible answers

In the example, the operating partnership's ordinary receipts in State A are $40 million of $400 million, or 10 percent. To keep the arithmetic visible, the example treats the receipt from the platform sale as $900 million in every state; a state that counts gross proceeds rather than net gain puts a larger figure in the denominator and magnifies every effect below.

• Throwout, or exclusion by type. The $900 million leaves State A's denominator. The percentage stays at 10 percent.
• Nowhere receipts. The $900 million stays in the denominator and in no numerator: $40 million over $1.3 billion, about 3.1 percent.
• A look-through. If State A's rule assigns the receipt by the platform's own presence and that measure is 5 percent in State A, the numerator gains $45 million: $85 million over $1.3 billion, about 6.5 percent.
• The seller's own factors. If State A assigns gains on intangibles by the seller's average property and payroll and that average is 8 percent, the numerator gains $72 million: about 8.6 percent.
• Commercial domicile. If State A assigns the receipt to the domicile of the entity sold and the platform is domiciled there, the numerator gains $900 million: $940 million over $1.3 billion, about 72 percent.

One sale produces State A percentages from about 3 to about 72 percent. Each figure is the answer under some state's statute; the work is knowing which statute State A has.

States that take the receipt out of the denominator

Throwout after approximation. Massachusetts provides that "in the case of sales other than sales of tangible personal property if the taxpayer is not taxable in a state to which a sale is assigned, or if the state or states to which such sales should be assigned cannot be determined or reasonably approximated, such sale shall be excluded from the numerator and denominator of the sales factor" (M.G.L. c. 63, section 38(h)(2)). The District of Columbia first requires that a state of assignment that "cannot be determined" be "reasonably approximated," and if the taxpayer is not taxable in the assigned state or the state cannot be determined or approximated, "the sale shall be excluded from the denominator of the sales factor" (D.C. Code section 47-1810.02(g)(3)(B), (C)). New Hampshire has the same rule by regulation for taxable periods ending on or after December 31, 2021: such a sale "shall be excluded from the denominator of the sales factor" (N.H. Code Admin. R. Rev 304.05(h), formerly Rev 304.041). In each, throwout is the last step, not the first; a receipt whose location the partnership could approximate is not thrown out because the approximation was not done.

Exclusion by type. Several states never reach the throwout question for a gain on stock or a partnership interest, because the receipt is outside the factor from the start. Massachusetts defines "sales" to exclude "interest, dividends and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities," and provides that "any sale of intangible property, not otherwise described in this clause or clause (4), shall be excluded from the numerator and the denominator of the sales factor" (M.G.L. c. 63, section 38, definition of sales and (f)(5)). The District does the same in its own words: "All other receipts from a sale of intangible property shall be excluded from the numerator and denominator of the sales factor" (D.C. Code section 47-1810.02(g)(3)(A)(iv)(II)(cc)). Minnesota's sales factor does not include interest, dividends, "sales of capital assets as defined in section 1221 of the Internal Revenue Code," or "sales of stock," and a sale of intangible property whose in-state use "cannot be determined" is excluded from both numerator and denominator (Minn. Stat. section 290.191, subd. 5(a), (i)). New York provides that "[d]ividends from stock, net gains (not less than zero) from sales of stock and net gains (not less than zero) from the sale of partnership interests are not included in either the numerator or denominator of the apportionment fraction" unless the Commissioner determines under subdivision 11 that inclusion is necessary to reflect the taxpayer's business income or capital properly (N.Y. Tax Law section 210-A.5(a)(2)(G)). In these four jurisdictions the platform sale leaves State A's percentage where it was, whatever the partnership knows about the platform.

Proportional assignment. New York's catch-all for services and other business receipts reaches the same arithmetic by assignment. After the customer's benefit and the delivery destination, the hierarchy uses "[t]he apportionment fraction for such receipts within the state determined pursuant to this subdivision for the preceding taxable year," or the current year's fraction "for those receipts that can be sourced using the hierarchy," with due diligence required at each step (N.Y. Tax Law section 210-A.10(a), (b)(3), (b)(4)). A receipt assigned in proportion to the receipts that could be placed leaves the fraction where they put it: the throwout result.

A rule that can be repealed. Throwout is a legislative choice, and legislatures reverse it. Louisiana repealed former subsection (M) of La. R.S. 47:287.95, which the House Legislative Services digest of the bill describes as excluding from the sales factor a sale assigned to a state where the taxpayer is not taxable, for tax years beginning on or after January 1, 2024 (2023 La. Acts No. 430, sections 2 and 3). A state map built for one year is checked against each state's current statute before it is used for the next.

States that keep the receipt and assign it

California: look-through, then fallbacks, no throwout. California assigns a receipt from the sale of an interest in a corporation or pass-through entity by looking through to that entity. For taxable years beginning before January 1, 2026, if 50 percent or more of the entity's assets, at original cost on the date of sale, were real or tangible personal property, the sale "will be assigned by averaging the payroll and property factors" of the entity; if more than 50 percent were intangible, "by using the sales factor" (former Cal. Code Regs., tit. 18, section 25136-2(d)(1)(A)1.a., b.). If the use of the intangible could not be determined that way, it was "reasonably approximated," and failing that the receipt was assigned to California "if the billing address of the purchaser is in this state" (section 25136-2(d)(1)(B), (C)). Neither era of the regulation contains a step that removes an unplaceable receipt from the denominator.

The amendments filed with the Secretary of State on August 27, 2025 apply to taxable years beginning on or after January 1, 2026 (section 25136-2(j)(3)) and keep the two branches, exclude "[c]ash, cash equivalents, prepaid items, and accounts receivable" from the asset calculation, and add three steps for a seller missing the entity's information. A taxpayer that cannot tell whether the entity's assets are mostly tangible "shall nevertheless assign gross receipts using payroll and property factor information"; a taxpayer with only one set of factors uses the set it has; and where the taxpayer has no information to assign the receipt under either branch, receipts from the sale of stock, an interest in a pass-through entity or goodwill "shall be assigned to this state if the entity whose stock, interest, or goodwill was sold has its commercial domicile in this state," with dividends assigned by the payor's commercial domicile (section 25136-2(d)(1)(A)1.c., d., e.). Commercial domicile is "the principal place from which the trade or business of the taxpayer is directed or managed" (Rev. and Tax. Code section 25120(b)). The 2026 fallback looks to the domicile of the entity sold, not of the seller. A partnership whose tool defaults unsourced receipts to its own domicile has adopted a rule California does not have.

Two further features set the size of the California denominator. Gross receipts are "the gross amounts realized" on a sale, and "[a]mounts realized on the sale or exchange of property shall not be reduced by the cost of goods sold or the basis of property sold" (Rev. and Tax. Code section 25120(f)(2)). And a substantial receipt from an occasional sale "of a fixed asset or other property held or used in the regular course of the taxpayer's trade or business" is excluded from the sales factor, a sale being substantial if its exclusion decreases the denominator by five percent or more and occasional "if the transaction is outside of the taxpayer's normal course of business and occurs infrequently" (Cal. Code Regs., tit. 18, section 25137(c)(1)(A)). That exclusion is a threshold question; this article assumes the receipt stays in. Once it does, the share of the receipt California's look-through does not assign to California stays in California's denominator. For California, nowhere treatment of the remainder is the correct answer.

Maine: a look-through with a different measure. Maine sources "[g]ross receipts on the sale of a partnership interest" by the ratio of "the original cost of partnership tangible property located in Maine" to the original cost of partnership tangible property everywhere at the time of sale, and, if more than 50 percent of the value of the partnership's assets consists of intangible property, by the partnership's sales factor for its first full tax period before the period of sale; the rule does not apply to a limited partner's interest in an investment partnership that meets an 80 percent intangible-asset test (36 M.R.S. section 5211(16-A)(F)). Maine's statute has no throwout for receipts of this kind; its throwout reaches sales of tangible personal property shipped to states where the taxpayer is not taxable (36 M.R.S. section 5211(14)(B)). The portion of the receipt Maine does not claim remains in its denominator. California and Maine both look through, but California averages the entity's payroll and property factors where Maine uses tangible property at original cost; the same sale produces a different numerator in each.

Maryland: the seller's own factors. Maryland's regulation, as currently compiled, provides that "[g]ross income from intangible items such as dividends, interest, royalties, and capital gains from the sale of intangible property shall be included in the numerator based upon the average of the property and payroll factors" (COMAR 03.04.03.08C(5)(d)). The measure is the taxpayer's own property and payroll, not the entity sold. The receipt is in the denominator in full and in the numerator at the seller's own average, which pulls the sales factor toward the property and payroll result rather than diluting it.

Virginia: costs of performance. Virginia places a sale other than a sale of tangible personal property in Virginia if "[t]he income-producing activity is performed in the Commonwealth," or, where it is performed in and outside Virginia, if "a greater proportion of the income-producing activity is performed in the Commonwealth than in any other state," measured by costs of performance (Va. Code section 58.1-416(A)). The test is all or nothing. For an investment acquired, managed and sold from one office, it tends to place the whole receipt where that office is, and nowhere else.

How one state's look-through dilutes every other state

The dilution follows from a modelling step, not from any statute. A tool computes California's look-through, finds that the platform's California payroll and property average 2 percent, puts $18 million of the $900 million in California's numerator, and books the remaining $882 million in a "not sourced" row that sits in every state's denominator and no state's numerator. For California the result is right. For every other state it is California's answer applied under another state's name.

Applied to State A, the tool's answer depends on which state State A is. If it is Massachusetts, the District, Minnesota or New York, the receipt never entered State A's factor; the tool reports about 3.1 percent where the statute produces 10 percent. If State A is a throwout state and the platform's location there cannot be determined or approximated, the same understatement follows. If State A has its own look-through, its numerator is computed by its own measure, not California's. If State A is Virginia and the partnership is managed there, the tool reports about 3.1 percent where the statute may produce about 72. And if the tool goes the other way, throwing the $882 million out of every denominator, it overstates California: its $60 million of California ordinary receipts plus the $18 million look-through share, $78 million, over $418 million, about 18.7 percent, rather than the $78 million over $1.3 billion, 6 percent, the regulation produces.

The error travels. The REIT partner and the management corporation combine factors that are too low in some states and too high in others with their own; the executive partnership's nonresident withholding and composite returns use the same percentages; and a later correction is a true-up across every tier, with interest. A gain larger than all other receipts combined moves every state's factor at once, in a direction set by the tool rather than by the states.

The distortion argument has a proper home. In a state that keeps unplaceable receipts in the denominator by rule, a partnership that believes the result misrepresents its activity has a statutory route, not a self-help one. California permits the taxpayer to petition for, or the Franchise Tax Board to require, separate accounting, the exclusion or inclusion of factors, or "any other method to effectuate an equitable allocation and apportionment" where the standard provisions "do not fairly represent the extent of the taxpayer's business activity in this state" (Rev. and Tax. Code section 25137), and the library's article on how a taxpayer petitions the Franchise Tax Board for alternative apportionment covers that procedure. New York authorizes the Commissioner to adjust a fraction that "does not result in a proper reflection of the taxpayer's business income or capital within the state" (N.Y. Tax Law section 210-A.11). Excluding receipts from a California denominator on the return, because their inclusion feels distortive, is a variance from the regulation, not an application of it.

Practice notes

A tiered partnership's apportionment tool needs a denominator map, not a "not sourced" column. For each filing state, the map answers four questions for each receipt type: whether the receipt enters the factor at all and at gross or net; whether the state has a sourcing rule of its own for it (a look-through, the seller's own factors, costs of performance, the domicile of the entity sold); what happens when that rule cannot place the receipt (approximation and throwout, a fallback, or nothing, which leaves it in the denominator); and whether the rule in force for the year is the one in the map. The map changes the data request to lower tiers. A lower tier that is sold, or that pays dividends, is asked for its asset composition at original cost (for California years from 2026, excluding cash, cash equivalents, prepaid items and accounts receivable), its payroll, property and sales factors by state, its tangible property at original cost by state, and its commercial domicile, because those are the inputs the look-through, fallback and domicile rules use. Missing information is approximated before it is called undeterminable, and the approximation is documented in the year it is made. The percentages that feed the corporate partners' returns, nonresident withholding and composite returns come from the map, and a later correction is planned as a true-up through every tier rather than discovered as one. The method, once chosen for a state, is applied the same way in a year when it raises that state's percentage as in a year when it lowers it. G&G State Tax Group provides multistate apportionment analysis and denominator mapping for tiered partnerships and their corporate partners alongside its state and local tax practice.