How Do You Classify a Corporation as a Unitary Business?

What “Unitary Business” Really Means (Plain English)

“Unitary business” is not just “we have subsidiaries” or “we share owners.” It’s the state-tax concept that says:

These companies are so operationally connected that their income can’t be fairly measured one entity at a time.

So instead of letting a group “slice” income into separate returns (often shifting profit into low-tax entities), many states use combined reporting and formula apportionment to tax a fair share of the group’s total business income.

My opinion: The unitary question is basically a realism test. If your companies act like one business to customers, vendors, or executives, the state will usually want to tax you like one business.

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Why States Care: Combined Reporting and Apportionment

When a state treats a group as unitary, it may require a combined report, which generally means:

1. Add up income across the members that belong in the combined group

2. Apply an apportionment formula (often based heavily on sales, sometimes property/payroll too)

3. Tax the portion attributable to that state

A large share of states use some version of combined reporting, often under “water’s edge” rules for multinationals.

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The 3 Classic Tests States Use to Identify a Unitary Business

While each state words things differently, most unitary analyses orbit the same three pillars (often described by courts and state guidance):

1) Functional Integration

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This is about operational interdependence—the real mechanics of how money is made.

Common indicators:

• Shared supply chain (central procurement, manufacturing, distribution)

• Intercompany sales of goods/services that are core (not trivial)

• Shared IP that drives revenue (brand, patents, software platform)

• Intercompany financing that isn’t “arms-length incidental,” but central to operations

Think: “If we unplug this entity, do the others break or get meaningfully worse?”

2) Centralization of Management

This is about who truly controls strategy and key decisions.

Common indicators:

• Overlapping executives who actually run multiple entities day-to-day

• Central approval of budgets, pricing, product strategy, HR policies

• Central treasury, risk management, legal, tax, or finance decision-making

3) Economies of Scale

This is about real cost advantages from operating together.

Common indicators:

• Shared accounting/ERP, payroll, HR, marketing, IT, legal

• Bulk purchasing power across the group

• Shared R&D and product development

• Shared customer data systems and analytics that improve performance

Courts and state authorities often describe these factors together as core indicia of unity.

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What Does Not Automatically Make You “Unitary”

This is where companies get burned—because they assume the legal structure answers the question.

Not enough by itself:

• Common ownership (even 100% ownership)

• A parent company that only does passive investment activities

• Shared board members who act only in a governance role

• A few admin overlaps (same registered agent, same CPA firm)

• One-time loans or occasional shared services that are minor and priced at market

A useful way to say it:

Ownership is the doorway. Operations are the proof.

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A Practical Step-by-Step Method to Classify Your Group

If you want a unitary analysis that survives real scrutiny, use this workflow.

Step 1: Build an entity + function map (not just an org chart)

List each legal entity and answer:

• What does it do?

• What does it own (IP, inventory, real estate, customer contracts)?

• How does it make money?

Tip for clean records: Make sure your entity names, EINs, and IRS records are consistent before you analyze anything across the group. These help:

Step 2: List “shared functions” and who controls them

Document who controls:

• Pricing strategy

• Vendor contracts

• Brand/marketing

• Hiring bands, HR policies

• Product roadmap / R&D

• Treasury and capital allocation

Step 3: Identify intercompany flows that matter

Look for:

• Management fees and shared services agreements

• IP licenses/royalties

• Inventory transfers, distribution agreements

• Central procurement or manufacturing arrangements

Step 4: Ask the “severability” question

If you separated the companies tomorrow, would you need to:

The more “yes” answers, the more unitary risk.

Step 5: Make the call—and document it like you expect a challenge

Whether your conclusion is “unitary” or “not unitary,” document:

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Real-Life Examples (How This Plays Out)

Example 1: Clearly Unitary (Retail + Logistics + Brand HoldCo)

• Parent owns brand trademarks

• OpCo runs stores and e-commerce

• LogisticsCo distributes inventory nationwide

• Central marketing, purchasing, and pricing

Why it’s unitary: The brand and logistics directly drive sales performance; separating them would materially damage the enterprise.

Example 2: Usually Unitary (SaaS Platform + Sales Entity + IP Entity)

• IP entity owns code and licenses it

• Operating entity provides service and support

• Sales entity signs contracts and manages customer relationships

• Shared product roadmap, shared engineering leadership

Why it’s unitary: The platform and commercialization are intertwined; you’re seeing one business split into legal pieces.

Example 3: Often Non-Unitary (Passive Investment Holding Company)

• HoldCo owns a minority investment in an unrelated company

• No shared systems, people, customers, or operations

• Investment is financial, not operational

This is the kind of fact pattern that often triggers “separate enterprise” arguments in disputes over apportionment and unitary scope.

Example 4: The Gray Area (Central Treasury + Shared Services “Light”)

My take: This can go either way. If treasury/shared services are mission critical and deeply integrated, unity risk rises. If it’s limited admin help priced at market and not operationally essential, you have better “non-unitary” footing.

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Documentation That Makes (or Breaks) a Unitary Position

Here’s what actually persuades auditors and reviewers:

Corporate structure + authority

Operational evidence

• Shared vendor contracts

• Shared systems (ERP, CRM, payroll)

• Shared sales/marketing plans

• Shared procurement and pricing policies

Intercompany agreements

• Service agreements (who does what, how charged)

• IP licenses (who owns what, who uses what)

• Loans/treasury policies

Clean administrative consistency

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If the State Challenges Your Classification: How to Respond (Without Making It Worse)

Unitary disputes are rarely won with emotion. They’re won with organization and proof.

Useful letter frameworks from your site (adaptable to state tax disputes):

If you need someone to communicate on the company’s behalf or sign with authority:

And if the dispute turns into a payment plan conversation while you resolve it:

My opinion: Your first response should read like a tidy case file: “Here are the facts, here are the exhibits, here is the requested outcome, here is the deadline we’re meeting.”

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Common Mistakes That Trigger a “Unitary” Finding

• Charging “management fees” with no contract, no deliverables, no methodology

• Treating an IP entity like a profit sponge (royalties) while claiming it’s unrelated

• Central executives running everything while claiming subsidiaries are independent

• One shared ERP/CRM + one shared sales force—but insisting entities are separate

• Sloppy entity identity records (name/EIN/address mismatches)

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FAQ

Is common ownership enough to be unitary?

Usually no. It’s relevant, but states generally want operational proof: integration, centralized control, and/or economies of scale.

Can two very different lines of business still be unitary?

Yes—if they share key functions (financing, systems, leadership, IP, procurement) in a way that produces a real “flow of value.”

Why does “unitary” matter so much in combined reporting states?

Because it determines whether the state can require a combined report and apportion group income rather than tax each entity separately.

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Checklists

Unitary Business Classification Checklist

• Identify every entity’s primary revenue source and core function

• List shared executives and who approves budgets/strategy

• Inventory shared services (HR, IT, accounting, marketing) and quantify impact

• Document intercompany transactions (IP, services, inventory, financing)

• Test “severability”: what breaks if entities separate?

• Write a conclusion memo with exhibits and contract references

Documentation Checklist (Audit-Ready)

• Current org chart + functional org chart (who runs what)

• Intercompany agreements + pricing methodologies

• Evidence of shared systems and shared vendors

• Board minutes / approvals for major decisions

• Entity identity records (EIN/name/address consistency)

• Prior filings and transcripts where relevant:

Dispute Response Checklist (If the State Says You’re Unitary)

• Confirm deadlines and appeal/protest procedures

• Respond in writing with a clean exhibit list

• Separate “facts” from “arguments”

• Provide contracts, org charts, and functional evidence

• Request a conference/hearing if allowed

• Document every phone call and submission method

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Video Section (Helpful Walkthroughs)

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Sources

• Supreme Court of the United States – Unitary business principle discussed in key cases, including Container Corp. and Allied-Signal.

• California Franchise Tax Board – Multistate Audit Technical Manual materials on unity factors and analysis.

• Institute on Taxation and Economic Policy – Overview of combined reporting approaches across states (including water’s edge).

• Center on Budget and Policy Priorities – Discussion of combined reporting adoption across states.

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Disclaimer

This article is for general educational purposes only and does not provide legal or tax advice. State rules vary widely, and unitary determinations are highly fact-specific, consult a qualified state and local tax professional for guidance on your situation.