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H.B. 73

             1     

WITHHOLDING EXEMPTION FOR CERTAIN

             2     
NONRESIDENT SHAREHOLDERS

             3     
2003 GENERAL SESSION

             4     
STATE OF UTAH

             5     
Sponsor: Gordon E. Snow

             6      This act modifies provisions relating to corporate franchise and income taxes and
             7      individual income taxes to provide that certain S corporations exempt from state
             8      corporate franchise or income taxes are exempt from the payment or withholding of tax
             9      on behalf of nonresident shareholders, to apply certain provisions to nonresident
             10      shareholders that are not individuals, and to make technical changes. This act has
             11      retrospective operation for taxable years beginning on or after January 1, 2003.
             12      This act affects sections of Utah Code Annotated 1953 as follows:
             13      AMENDS:
             14          59-7-101, as last amended by Chapter 76, Laws of Utah 2002
             15          59-7-702, as enacted by Chapter 169, Laws of Utah 1993
             16          59-7-703, as enacted by Chapter 169, Laws of Utah 1993
             17          59-10-108.2, as enacted by Chapter 169, Laws of Utah 1993
             18      Be it enacted by the Legislature of the state of Utah:
             19          Section 1. Section 59-7-101 is amended to read:
             20           59-7-101. Definitions.
             21          As used in this chapter:
             22          (1) "Adjusted income" means unadjusted income as modified by Sections 59-7-105
             23      and 59-7-106 .
             24          (2) (a) "Affiliated group" means one or more chains of corporations that are connected
             25      through stock ownership with a common parent corporation that meet the following
             26      requirements:
             27          (i) at least 80% of the stock of each of the corporations in the group, excluding the



             28      common parent corporation, is owned by one or more of the other corporations in the group;
             29      and
             30          (ii) the common parent directly owns at least 80% of the stock of at least one of the
             31      corporations in the group.
             32          (b) "Affiliated group" does not include corporations that are qualified to do business
             33      but are not otherwise doing business in this state.
             34          (c) For purposes of this Subsection (2), "stock" does not include nonvoting stock which
             35      is limited and preferred as to dividends.
             36          (3) "Apportionable income" means adjusted income less nonbusiness income net of
             37      related expenses, to the extent included in adjusted income.
             38          (4) "Apportioned income" means apportionable income multiplied by the
             39      apportionment fraction as determined in Section 59-7-311 .
             40          (5) "Business income" means income as defined in Section 59-7-302 .
             41          (6) "Corporate return" or "return" includes a combined report.
             42          (7) (a) "Common ownership" means the direct or indirect control or ownership of more
             43      than 50% of the outstanding voting stock of:
             44          (i) a parent-subsidiary controlled group as defined in Section 1563, Internal Revenue
             45      Code, except that 50% shall be substituted for 80%;
             46          (ii) a brother-sister controlled group as defined in Section 1563, Internal Revenue
             47      Code, except that 50% shall be substituted for 80%; or
             48          (iii) three or more corporations each of which is a member of a group of corporations
             49      described in Subsection (2)(a)(i) or (2)(a)(ii), and one of which is:
             50          (A) a common parent corporation included in a group of corporations described in
             51      Subsection (2)(a)(i); and
             52          (B) included in a group of corporations described in Subsection (2)(a)(ii).
             53          (b) Ownership of outstanding voting stock shall be determined by Section 1563,
             54      Internal Revenue Code.
             55          (8) "Corporation" includes:
             56          (a) entities defined as corporations under Sections 7701(a) and 7704, Internal Revenue
             57      Code; and
             58          (b) other organizations that are taxed as corporations for federal income tax purposes


             59      under the Internal Revenue Code.
             60          (9) "Dividend" means any distribution, including money or other type of property,
             61      made by a corporation to its shareholders out of its earnings or profits accumulated after
             62      December 31, 1930.
             63          (10) (a) "Doing business" includes any transaction in the course of its business by a
             64      domestic corporation, or by a foreign corporation qualified to do or doing intrastate business in
             65      this state.
             66          (b) Except as provided in Subsection 59-7-102 (2), "doing business" includes:
             67          (i) the right to do business through incorporation or qualification;
             68          (ii) the owning, renting, or leasing of real or personal property within this state; and
             69          (iii) the participation in joint ventures, working and operating agreements, the
             70      performance of which takes place in this state.
             71          (11) "Domestic corporation" means a corporation that is incorporated or organized
             72      under the laws of this state.
             73          (12) (a) "Farmers' cooperative" means an association, corporation, or other
             74      organization that is:
             75          (i) (A) an association, corporation, or other organization of:
             76          (I) farmers; or
             77          (II) fruit growers; or
             78          (B) an association, corporation, or other organization that is similar to an association,
             79      corporation, or organization described in Subsection (12)(a)(i)(A); and
             80          (ii) organized and operated on a cooperative basis to:
             81          (A) (I) market the products of members of the cooperative or the products of other
             82      producers; and
             83          (II) return to the members of the cooperative or other producers the proceeds of sales
             84      less necessary marketing expenses on the basis of the quantity of the products of a member or
             85      producer or the value of the products of a member or producer; or
             86          (B) (I) purchase supplies and equipment for the use of members of the cooperative or
             87      other persons; and
             88          (II) turn over the supplies and equipment described in Subsection (12)(a)(ii)(B)(I) at
             89      actual costs plus necessary expenses to the members of the cooperative or other persons.


             90          (b) (i) Subject to Subsection (12)(b)(ii), for purposes of this Subsection (12), the
             91      commission by rule, made in accordance with Title 63, Chapter 46a, Utah Administrative
             92      Rulemaking Act, shall define:
             93          (A) the terms:
             94          (I) "member"; and
             95          (II) "producer"; and
             96          (B) what constitutes an association, corporation, or other organization that is similar to
             97      an association, corporation, or organization described in Subsection (12)(a)(i)(A).
             98          (ii) The rules made under this Subsection (12)(b) shall be consistent with the filing
             99      requirements under federal law for a farmers' cooperative.
             100          (13) "Foreign corporation" means a corporation that is not incorporated or organized
             101      under the laws of this state.
             102          (14) (a) "Foreign operating company" means a corporation that:
             103          (i) is incorporated in the United States; and
             104          (ii) 80% or more of whose business activity, as determined under Section 59-7-401 , is
             105      conducted outside the United States.
             106          (b) "Foreign operating company" does not include a corporation that qualifies for the
             107      Puerto Rico and Possession Tax Credit as provided in Section 936, Internal Revenue Code.
             108          (15) "Foreign sales corporation" means a corporation as defined in Section 922,
             109      Internal Revenue Code.
             110          (16) "Income" includes losses.
             111          (17) "Internal Revenue Code" means Title 26 of the United States Code as effective
             112      during the year in which Utah taxable income is determined.
             113          (18) "Nonbusiness income" means income as defined in Section 59-7-302 .
             114          (19) "Nonresident shareholder" means any shareholder of an S corporation who on the
             115      last day of the taxable year of the S corporation, is:
             116          (a) an individual not domiciled in Utah; [or]
             117          (b) a nonresident trust or nonresident estate, as defined in Section 59-10-103 [.]; or
             118          (c) an organization exempt under Section 501, Internal Revenue Code.
             119          (20) "Related expenses" means:
             120          (a) expenses directly attributable to nonbusiness income; and


             121          (b) the portion of interest or other expense indirectly attributable to both nonbusiness
             122      and business income which bears the same ratio to the aggregate amount of such interest or
             123      other expense, determined without regard to this Subsection (20), as the average amount of the
             124      asset producing the nonbusiness income bears to the average amount of all assets of the
             125      taxpayer within the taxable year.
             126          (21) "Resident shareholder" means any shareholder of an S corporation who is not a
             127      nonresident shareholder.
             128          (22) "S corporation" means a small business corporation as defined in Section 1361,
             129      Internal Revenue Code.
             130          (23) "Safe harbor lease" means a lease that qualified as a safe harbor lease under
             131      Section 168, Internal Revenue Code.
             132          (24) "State of the United States" includes any of the 50 states or the District of
             133      Columbia and "United States" includes the 50 states and the District of Columbia.
             134          (25) (a) "Taxable year" means the calendar year or the fiscal year ending during such
             135      calendar year upon the basis of which the adjusted income is computed.
             136          (b) In the case of a return made for a fractional part of a year under this chapter or
             137      under rules prescribed by the commission, "taxable year" includes the period for which such
             138      return is made.
             139          (26) "Taxpayer" means any corporation subject to the tax imposed by this chapter.
             140          (27) "Threshold level of business activity" means business activity in the United States
             141      equal to or greater than 20% of the corporation's total business activity as determined under
             142      Section 59-7-401 .
             143          (28) "Unadjusted income" means federal taxable income as determined on a separate
             144      return basis before intercompany eliminations as determined by the Internal Revenue Code,
             145      before the net operating loss deduction and special deductions for dividends received.
             146          (29) (a) "Unitary group" means a group of corporations that:
             147          (i) are related through common ownership; and
             148          (ii) by a preponderance of the evidence as determined by a court of competent
             149      jurisdiction or the commission, are economically interdependent with one another as
             150      demonstrated by the following factors:
             151          (A) centralized management;


             152          (B) functional integration; and
             153          (C) economies of scale.
             154          (b) "Unitary group" does not include S corporations.
             155          (30) "Utah net loss" means the current year Utah taxable income before Utah net loss
             156      deduction, if determined to be less than zero.
             157          (31) "Utah net loss deduction" means the amount of Utah net losses from other taxable
             158      years that may be carried back or carried forward to the current taxable year in accordance with
             159      Section 59-7-110 .
             160          (32) (a) "Utah taxable income" means Utah taxable income before net loss deduction
             161      less Utah net loss deduction.
             162          (b) "Utah taxable income" includes income from tangible or intangible property located
             163      or having situs in this state, regardless of whether carried on in intrastate, interstate, or foreign
             164      commerce.
             165          (33) "Utah taxable income before net loss deduction" means apportioned income plus
             166      nonbusiness income allocable to Utah net of related expenses.
             167          (34) (a) "Water's edge combined report" means a report combining the income and
             168      activities of:
             169          (i) all members of a unitary group that are:
             170          (A) corporations organized or incorporated in the United States, including those
             171      corporations qualifying for the Puerto Rico and Possession Tax Credit as provided in Section
             172      936, Internal Revenue Code, in accordance with Subsection (34)(b); and
             173          (B) corporations organized or incorporated outside of the United States meeting the
             174      threshold level of business activity; and
             175          (ii) an affiliated group electing to file a water's edge combined report under Subsection
             176      59-7-402 (2).
             177          (b) There is a rebuttable presumption that a corporation which qualifies for the Puerto
             178      Rico and Possession Tax Credit provided in Section 936, Internal Revenue Code, is part of a
             179      unitary group.
             180          (35) "Worldwide combined report" means the combination of the income and activities
             181      of all members of a unitary group irrespective of the country in which the corporations are
             182      incorporated or conduct business activity.


             183          Section 2. Section 59-7-702 is amended to read:
             184           59-7-702. Taxation of shareholders.
             185          (1) Except as provided in Subsection (2), items of Utah taxable income, expenses,
             186      losses, and credits shall be passed through to the shareholders and be taxed as provided in
             187      Subtitle A, Chapter 1S, Part 2, Internal Revenue Code.
             188          (2) (a) A resident shareholder shall recognize [his] the resident shareholder's
             189      proportionate share of an S corporation's Utah taxable income.
             190          (b) A nonresident shareholder shall recognize [that] the portion of an S corporation's
             191      Utah taxable income derived from Utah sources [as provided in]:
             192          (i) if the nonresident shareholder is subject to this chapter, in accordance with Part 3,
             193      Allocation and Apportionment of Income - Utah UDITPA Provisions; or
             194          (ii) if the nonresident shareholder is subject to Chapter 10, Individual Income Tax Act,
             195      in accordance with Sections 59-10-117 and 59-10-118 .
             196          Section 3. Section 59-7-703 is amended to read:
             197           59-7-703. Payment or withholding of tax on behalf of nonresident shareholders --
             198      Rate.
             199          (1) As used in this section, "return" means:
             200          (a) if a nonresident shareholder is required to file a return under this chapter, a return
             201      filed under this chapter; or
             202          (b) if a nonresident shareholder is required to file a return under Chapter 10, Individual
             203      Income Tax Act, a return filed under Chapter 10, Individual Income Tax Act.
             204          [(1)] (2) (a) [An] Except as provided in Subsection (4), an S corporation shall pay or
             205      withhold a tax on behalf of any nonresident shareholder.
             206          (b) The amount [remitted] paid or withheld by an S corporation under Subsection
             207      (2)(a) shall be determined by:
             208          (i) calculating the items of income or loss from [Schedule K of the 1120S] federal form
             209      1120S, Schedule K;
             210          (ii) applying the apportionment formula to determine the amount apportioned to
             211      Utah h [ [ ] ; [ ] ] [ :
             212          (A) if the nonresident shareholder is subject to this chapter, in accordance with Part 3,
             213      Allocation and Apportionment of Income - Utah UDITPA Provisions; or
] h


             214           h [ (B) if the nonresident shareholder is subject to Chapter 10, Individual Income Tax Act,
             215      in accordance with Sections 59-10-117 and 59-10-118 ;
] h

             216          (iii) reducing the amount apportioned to Utah by the percentage of ownership
             217      attributable to resident shareholders; and
             218          (iv) applying the rate to the remaining balance.
             219          (3) (a) For a nonresident shareholder who is required to file a return under this chapter:
             220          [(b) A] (i) the nonresident shareholder [is entitled to] may claim a credit on the [Utah
             221      individual] nonresident shareholder's return for the amount of tax paid or withheld by the S
             222      corporation on behalf of the nonresident shareholder[.];
             223          [(c) A] (ii) if the nonresident shareholder [who is an individual and] has no other Utah
             224      source income, the nonresident shareholder may [forego] elect:
             225          (A) not to claim the credit provided under Subsection [(b)] (3)(a)(i); and
             226          (B) not to file a [Utah individual income tax] return for the taxable year[. If the
             227      individual is entitled to credits under Utah law, an individual income tax]; and
             228          (iii) if the nonresident shareholder may claim credits other than the credit described in
             229      Subsection (3)(a)(i), the nonresident shareholder shall file a return [must be filed] to claim
             230      those credits.
             231          (b) If a nonresident shareholder is required to file a return under Chapter 10, Individual
             232      Income Tax Act, the nonresident shareholder is subject to Section 59-10-108.2 .
             233          (4) Notwithstanding Subsection (2), the obligation to pay or withhold a tax under
             234      Subsection (2) does not apply to an organization that is exempt under Subsection
             235      59-7-102 (1)(a) from the taxes imposed by this chapter.
             236          [(2) The] (5) (a) In accordance with Title 63, Chapter 46a, Utah Administrative
             237      Rulemaking Act, the commission[, by rule,] shall by rule determine the rate [that] at which an
             238      S corporation shall withhold for nonresident shareholders.
             239          (b) The rate described in Subsection (5)(a) shall be consistent with the composite tax
             240      rate paid by partnerships.
             241          [(3)] (6) (a) If [the] an S corporation fails to pay or withhold [the] a tax as provided in
             242      this section, and thereafter the income subject to payment or withholding is reported and the
             243      resulting tax is paid by [the] a nonresident shareholder, any tax required to be paid or withheld
             244      [shall] may not be collected from the S corporation. [However, the]


             245          (b) A nonresident shareholder's payment under Subsection (6)(a) does not relieve the S
             246      corporation from liability for penalties or interest associated with failure to pay or withhold
             247      [the] a tax as provided in this section.
             248          [(4)] (7) Penalties, refunds, assessments, and required records for S corporations shall
             249      be governed by [Title 59,]:
             250          (a) this chapter if a nonresident shareholder is subject to this chapter; or
             251          (b) Chapter 10, Individual Income Tax Act, if a nonresident shareholder is subject to
             252      Chapter 10, Individual Income Tax Act.
             253          [(5) The] (8) (a) An S corporation shall furnish each nonresident shareholder a
             254      statement showing:
             255          (i) the amount of the nonresident shareholder's share of the corporate earnings from
             256      Utah sources; and
             257          (ii) the amount of the withholding from [it and] the nonresident shareholder's share of
             258      the corporate earnings from Utah sources.
             259          (b) An S corporation shall pay the commission the amount withheld[,] under this
             260      section:
             261          (i) by the due date of the corporation's return, not including extensions[,]; and
             262          (ii) on forms furnished by the commission.
             263          Section 4. Section 59-10-108.2 is amended to read:
             264           59-10-108.2. Credit for nonresident shareholders of S corporations.
             265          (1) (a) A nonresident shareholder of an S corporation who is an individual [shall be
             266      allowed] may claim a credit against the tax otherwise due under this chapter.
             267          (b) The credit described in Subsection (1)(a) is equal to the amount paid or withheld by
             268      the S corporation on behalf of the individual [as provided] in accordance with Section
             269      59-7-703 .
             270          (2) A nonresident shareholder of an S corporation who is an individual [of an S
             271      corporation] and who has no other Utah source income may [forego] elect:
             272          (a) not to claim the credit provided in Subsection (1); and
             273          (b) not to file a Utah individual income tax return for [that] the taxable year.
             274          (3) If [the individual is entitled to credits under Utah law,] a nonresident shareholder
             275      may claim credits other than the credit described in Subsection (1), the nonresident shareholder


             276      shall file an individual income tax return [must be filed] to claim those credits.
             277          Section 5. Retrospective operation.
             278          This act has retrospective operation for taxable years beginning on or after January 1,
             279      2003.




Legislative Review Note
    as of 1-6-03 10:01 AM


A limited legal review of this legislation raises no obvious constitutional or statutory concerns.

Office of Legislative Research and General Counsel


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