5.3.5.4 Pros and cons of the system in the United States

An important negative aspect of the system as applied in the United States is its lack of uniformity. This is harmful as similar situations are not necessarily treated the same, and the system leads to high administrative costs for both taxpayers and tax authorities. Additionally, differences in apportionment formulae, nexus rules and definitions of apportionable income can lead to double taxation and double non-taxation.1 Moreover, it can stimulate tax competition between states. Therefore, it can provide tax avoidance opportunities, while the main reason formulary apportionment was introduced in the United States is that it allegedly reduces tax avoidance. The complexity of the rules is also a serious drawback.2

However, as there is no uniform system each state retains sovereignty and flexibility with regard to taxation. Additionally, the unitary business approach that is applied by some states is an interesting aspect of the system in the United States. The worldwide approach as formerly taken by California contributed to the neutrality of the system. Also, as physical presence does not seem required to conclude that a sufficient economic nexus exists, the system seems to be able to take into account the digital economy.