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S.B. 136 Enrolled

             1     

APPORTIONMENT OF BUSINESS INCOME AND

             2     
DEDUCTION OF NET LOSSES BY AN

             3     
ACQUIRED CORPORATION

             4     
2008 GENERAL SESSION

             5     
STATE OF UTAH

             6     
Chief Sponsor: Wayne L. Niederhauser

             7     
House Sponsor: John Dougall

             8     
             9      LONG TITLE
             10      General Description:
             11          This bill amends the Corporate Franchise and Income Taxes chapter and the Individual
             12      Income Tax Act relating to the apportionment of business income and the calculation of
             13      a net loss deduction by an acquired corporation.
             14      Highlighted Provisions:
             15          This bill:
             16          .    addresses the calculation of a net loss deduction by an acquired corporation;
             17          .    for purposes of apportionment of business income, addresses the circumstances
             18      under which certain receipts, rents, royalties, or sales are considered to be in this
             19      state;
             20          .    addresses the apportionment of business income for purposes of the individual
             21      income tax; and
             22          .    makes technical changes.
             23      Monies Appropriated in this Bill:
             24          None
             25      Other Special Clauses:
             26          This bill provides an effective date.
             27      Utah Code Sections Affected:
             28      AMENDS:
             29          59-7-110, as last amended by Laws of Utah 1994, Chapter 83


             30          59-7-319, as last amended by Laws of Utah 1992, Chapter 165
             31          59-10-118, as last amended by Laws of Utah 1995, Chapter 311
             32     
             33      Be it enacted by the Legislature of the state of Utah:
             34          Section 1. Section 59-7-110 is amended to read:
             35           59-7-110. Utah net losses -- Carryforwards and carrybacks -- Deduction.
             36          (1) The amount of Utah net loss which shall be carried back or forward to offset income
             37      of another taxable year shall be determined as provided in this section.
             38          (2) (a) A Utah net loss from a taxable year beginning before January 1, 1994, shall be
             39      carried back three taxable years preceding the taxable year of the loss and any remaining loss
             40      shall be carried forward five taxable years following the taxable year of the loss, subject to the
             41      limitations of this section.
             42          (b) A Utah net loss from a taxable year beginning on or after January 1, 1994, may be
             43      carried back three taxable years preceding the taxable year of the loss and carried forward 15
             44      taxable years following the taxable year of the loss, subject to the limitations of this section. If
             45      an election is made to forego the federal net operating loss carryback, the Utah net loss is not
             46      eligible to be carried back unless an election is made for state purposes.
             47          (3) The Utah net loss shall be carried to the earliest eligible year for which the Utah
             48      taxable income before net loss deduction, minus Utah net losses from previous years which
             49      were applied or required to be applied to offset income, is not less than zero.
             50          (4) (a) Except as provided in Subsection (4)(a)(iii), the amount of Utah net loss which
             51      shall be carried to the year identified in Subsection (3) shall be the lesser of:
             52          (i) the remaining Utah net loss after deduction of any amounts of such loss which were
             53      carried to previous years; or
             54          (ii) the remaining Utah taxable income before net loss deduction of the year identified in
             55      Subsection (3) after deduction of Utah net losses from previous years which were carried or
             56      required to be carried to such year; and
             57          (iii) in any event, the amount carried back from a taxable year beginning on or after


             58      January 1, 1994, may not exceed $1,000,000 in Utah taxable income for each corporate return
             59      filed in a taxable year; any losses in excess of $1,000,000 may be carried forward; and
             60          (b) any remaining Utah net loss shall be available to be carried to one or more taxable
             61      years in accordance with this section.
             62          (5) (a) Corporations acquiring the assets or stock of another corporation may not
             63      deduct any net loss incurred by the acquired corporation prior to the date of acquisition. This
             64      subsection does not apply if the only change in the corporation is that of the state of
             65      incorporation.
             66          (b) An acquired corporation may deduct its net losses incurred before the date of
             67      acquisition against its separate income as calculated under Subsection (6) if the acquired
             68      corporation has continued to carry on a trade or business substantially the same as that
             69      conducted before such acquisition.
             70          (6) For purposes of Subsection (5)(b), the amount of net loss an acquired corporation
             71      that is acquired by a unitary group may deduct is calculated by:
             72          (a) subject to Subsection (7), calculating the sum of:
             73          (i) an amount determined by dividing the average value of the acquired corporation's
             74      real and tangible personal property owned or rented and used in this state during the taxable
             75      year by the average value of all of the unitary group's real and tangible personal property owned
             76      or rented and used during the taxable year;
             77          (ii) an amount determined by dividing the total amount paid in this state during the
             78      taxable year by the acquired corporation for compensation by the total compensation paid
             79      everywhere by the unitary group during the taxable year; and
             80          (iii) an amount determined by:
             81          (A) dividing the total sales of the acquired corporation in this state during the taxable
             82      year by the total sales of the unitary group everywhere during the taxable year; and
             83          (B) if the unitary group elects to apportion business income to this state using the
             84      method described in Subsection 59-7-311 (2)(b), multiplying the amount calculated under
             85      Subsection (6)(a)(iii)(A) by two;


             86          (b) dividing the amount calculated under Subsection (6)(a) by the denominator of the
             87      fraction for the unitary group to apportion business income to this state using the same election
             88      for calculating that denominator that the unitary group uses:
             89          (i) for that taxable year; and
             90          (ii) in accordance with Section 59-7-311 ;
             91          (c) multiplying the amount calculated under Subsection (6)(b) by the business income of
             92      the unitary group for the taxable year that is subject to apportionment under Section 59-7-311 ;
             93      and
             94          (d) calculating the sum of:
             95          (i) the amount calculated under Subsection (6)(c); and
             96          (ii) the following amounts allocable to the acquired corporation for the taxable year:
             97          (A) nonbusiness income allocable to this state; or
             98          (B) nonbusiness loss allocable to this state.
             99          (7) The amounts calculated under Subsection (6)(a) shall be derived in the same manner
             100      as those amounts are derived for purposes of apportioning the unitary group's business income
             101      before deducting the net loss, including a modification made in accordance with Section
             102      59-7-320 .
             103          Section 2. Section 59-7-319 is amended to read:
             104           59-7-319. Receipt, rent, royalty, or sale in connection with other than tangible
             105      personal property -- When considered to be in this state.
             106          [(1) Sales, other than sales of tangible personal property, are in this state if:]
             107          [(a) the income-producing activity is performed in this state; or]
             108          [(b) the income-producing activity is performed both in and outside this state and a
             109      greater proportion of the income-producing activity is performed in this state than in any other
             110      state, based on costs of performance.]
             111          (1) (a) Subject to Subsection (1)(b), as used in this section, "regulated investment
             112      company" is as defined in Section 851(a), Internal Revenue Code, in effect for the taxable year.
             113          (b) "Regulated investment company" includes a trustee or sponsor of an employee


             114      benefit plan that has an account in a regulated investment company.
             115          (2) The following are considered to be in this state:
             116          (a) a rent in connection with real property if the real property is in this state;
             117          (b) a royalty in connection with real property if the real property is in this state;
             118          (c) a sale in connection with real property if the real property is in this state; or
             119          (d) other income in connection with real property if the real property is in this state.
             120          (3) (a) Subject to Subsection (3)(b), a receipt from the performance of a service is
             121      considered to be in this state if the purchaser of the service receives a greater benefit of the
             122      service in this state than in any other state.
             123          (b) In accordance with Title 63, Chapter 46a, Utah Administrative Rulemaking Act, the
             124      commission may by rule prescribe the circumstances under which a purchaser of a service
             125      receives a greater benefit of the service in this state than in any other state.
             126          (4) (a) Subject to Subsection (4)(b), a receipt in connection with intangible property is
             127      considered to be in this state if the intangible property is used in this state.
             128          (b) If the intangible property described in Subsection (4)(a) is used in this state and
             129      outside this state, a receipt in connection with the intangible property shall be apportioned to
             130      this state in accordance with Subsection (4)(c).
             131          (c) For purposes of Subsection (4)(b), for a taxable year the percentage of a receipt in
             132      connection with intangible property that is considered to be in this state is the percentage of the
             133      use of the intangible property that occurs in this state during the taxable year.
             134          [(2)] (5) (a) Notwithstanding [Subsection (1), sales, other than sales] Subsections (2)
             135      through (4), a sale, other than a sale of tangible personal property, derived, directly or
             136      indirectly, from the sale of management, distribution, or administration services to, or on behalf
             137      of a regulated investment company, [as defined in Section 851(a) of the Internal Revenue Code
             138      of 1986, including trustees or sponsors of employee benefit plans which have accounts in a
             139      regulated investment company, shall be assigned to] is considered to be in this state:
             140          (i) to the extent that shareholders of the regulated investment company are domiciled in
             141      the state [as follows: (a) by multiplying]; and


             142          (ii) as provided in this Subsection (5).
             143          (b) For purposes of Subsection (5)(a), the amount of a sale, other than a sale of tangible
             144      personal property, that is considered to be in this state is calculated by determining the product
             145      of:
             146          (i) the taxpayer's total dollar amount of sales of [such] the services [by]; and
             147          (ii) a fraction, the numerator of which is the average of the sum of the beginning of the
             148      year and the end of year balance of shares owned by the investment company shareholders
             149      domiciled in this state[;] and the denominator of which is the average of the sum of the
             150      beginning of the year and end of year balance of shares owned by the investment company
             151      shareholders.
             152          [(b)] (c) A separate computation shall be made to determine the sales for each
             153      investment company.
             154          [(3)] (6) (a) Notwithstanding [Subsection (1)] Subsections (2) through (4) and subject
             155      to Subsection (6)(b), the following sales [shall be assigned to the] are considered to be in this
             156      state to the extent that customers of a securities brokerage business are domiciled in the state:
             157          (i) [sales, other than sales] a sale, other than a sale of tangible personal property,
             158      derived, directly or indirectly, from the sale of a securities brokerage [services] service by a
             159      taxpayer [which in this state is] if that taxpayer is primarily engaged in providing [services] a
             160      service in this state to a regulated investment company [as described in Subsection (2)]; or
             161          (ii) [sales, other than sales] a sale, other than a sale of tangible personal property,
             162      derived, directly or indirectly, from the sale of a securities brokerage [services] service by a
             163      taxpayer [which] that is an affiliate of a taxpayer [which, in this state,] that provides [services] a
             164      service in this state to a regulated investment company [as described in Subsection (2)].
             165          [(b) This assignment of sales shall be determined as follows: by multiplying]
             166          (b) For purposes of Subsection (6)(a), the amount of a sale, other than a sale of tangible
             167      personal property, that is considered to be in this state is calculated by determining the product
             168      of:
             169          (i) the taxpayer's total dollar amount of sales of securities brokerage services [by]; and


             170          (ii) a fraction, the numerator of which is the receipts from securities brokerage services
             171      from customers of the taxpayer domiciled in this state, and the denominator of which is the
             172      receipts from securities brokerage services from all customers of the taxpayer.
             173          Section 3. Section 59-10-118 is amended to read:
             174           59-10-118. Division of income for tax purposes.
             175          (1) As used in this section [unless the context otherwise requires]:
             176          (a) "Business income" means income arising from transactions and activity in the
             177      regular course of [the] a taxpayer's trade or business and includes income from tangible and
             178      intangible property if the acquisition, management, and disposition of the property constitutes
             179      integral parts of the taxpayer's regular trade or business operations.
             180          (b) "Commercial domicile" means the principal place from which the trade or business
             181      of [the] a taxpayer is directed or managed.
             182          [(c) "Compensation" means wages, salaries, commissions, and any other form of
             183      remuneration paid to employee for personal services.]
             184          [(d)] (c) "Nonbusiness income" means all income other than business income.
             185          [(e)] (d) "Sales" means all gross receipts of [the] a taxpayer not allocated under
             186      Subsections (3) through (7).
             187          [(f)] (e) "State" means any state of the United States, the District of Columbia, the
             188      commonwealth of Puerto Rico, [and] or any possession of the United States.
             189          (2) [Any] A taxpayer having business income [which] that is taxable both within and
             190      without this state, shall allocate and apportion [his] the taxpayer's net income as provided in this
             191      section.
             192          (3) Rents and royalties from real or tangible personal property, capital gains, interest,
             193      dividends, or patent or copyright royalties, to the extent that they constitute nonbusiness
             194      income, shall be allocated as provided in Subsections (4) through (7).
             195          (4) (a) Net rents and royalties from real property located in this state are allocable to
             196      this state.
             197          (b) Net rents and royalties from tangible personal property are allocable to this state:


             198          (i) if and to the extent that the property is utilized in this state; or
             199          (ii) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer
             200      is not organized under the laws of or taxable in the state in which the property is utilized.
             201          (c) The extent of utilization of tangible personal property in a state is determined by
             202      multiplying the rents and royalties by a fraction, the numerator of which is the number of days
             203      of physical location of the property in the state during the rental or royalty period in the taxable
             204      year and the denominator of which is the number of days of physical location of the property
             205      everywhere during all rental or royalty periods in the taxable year. If the physical location of the
             206      property during the rental or royalty period is unknown or unascertainable by the taxpayer,
             207      tangible personal property is utilized in the state in which the property was located at the time
             208      the rental or royalty payer obtained possession.
             209          (5) (a) Capital gains and losses from sales of real property located in this state are
             210      allocable to this state.
             211          (b) Capital gains and losses from sales of tangible personal property are allocable to this
             212      state if:
             213          (i) the property [had] has a situs in this state at the time of the sale; or
             214          (ii) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in
             215      the state in which the property had a situs.
             216          (c) Capital gains and losses from sales of intangible personal property are allocable to
             217      this state if the taxpayer's commercial domicile is in this state.
             218          (6) Interest and dividends are allocable to this state if the taxpayer's commercial
             219      domicile is in this state.
             220          (7) (a) Patent and copyright royalties are allocable to this state:
             221          (i) if and to the extent that the patent or copyright is utilized by the payer in this state;
             222      or
             223          (ii) if and to the extent that the patent or copyright is utilized by the payer in a state in
             224      which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state.
             225          (b) A patent is utilized in a state to the extent that it is employed in production,


             226      fabrication, manufacturing, or other processing in the state or to the extent that a patented
             227      product is produced in the state. If the basis of receipts from patent royalties does not permit
             228      allocation to states or if the accounting procedures do not reflect states of utilization, the patent
             229      is utilized in the state in which the taxpayer's commercial domicile is located.
             230          (8) All business income shall be apportioned to this state [by multiplying the income by
             231      a fraction, the numerator of which is the property factor plus the payroll factor plus the sales
             232      factor, and the denominator of which is three] using the same methods, procedures, and
             233      requirements of Sections 59-7-311 through 59-7-320 .
             234          [(9) The property factor is a fraction, the numerator of which is the average value of the
             235      taxpayer's real and tangible personal property owned or rented and used in this state during the
             236      tax period and the denominator of which is the average value of all the taxpayer's real and
             237      tangible personal property owned or rented and used during the tax period.]
             238          [(10) Property owned by the taxpayer is valued at its original cost. Property rented by
             239      the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the
             240      annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from
             241      subrentals.]
             242          [(11) The average value of property shall be determined by averaging the values at the
             243      beginning and ending of the tax period but the commission may require the averaging of
             244      monthly values during the tax period, if reasonably required to reflect properly the average
             245      value of the taxpayer's property.]
             246          [(12) The payroll factor is a fraction, the numerator of which is the total amount paid in
             247      this state during the tax period by the taxpayer for compensation, and the denominator of which
             248      is the total compensation paid everywhere during the tax period.]
             249          [(13) Compensation is paid in this state if:]
             250          [(a) the individual's service is performed entirely within the state; or]
             251          [(b) the individual's service is performed both within and without the state, but the
             252      service performed without the state is incidental to the individual's service within the state; or]
             253          [(c) some of the service is performed in the state and:]


             254          [(i) the base of operations or, if there is no base of operations, the place from which the
             255      service is directed or controlled is in the state; or]
             256          [(ii) the base of operations or the place from which the service is directed or controlled
             257      is not in any state in which some part of the service is performed, but the individual's residence
             258      is in this state.]
             259          [(14) The sales factor is a fraction, the numerator of which is the total sales of the
             260      taxpayer in this state during the tax period, and the denominator of which is the total sales of
             261      the taxpayer everywhere during the tax period.]
             262          [(15) Sales of tangible personal property are in this state if the property is delivered or
             263      shipped to a purchaser within this state regardless of the f.o.b. point or other conditions of the
             264      sale.]
             265          [(16) Sales, other than sales of tangible personal property, are in this state if:]
             266          [(a) the income-producing activity is performed in this state; or]
             267          [(b) the income-producing activity is performed both in and outside this state and a
             268      greater proportion of the income-producing activity is performed in this state than in any other
             269      state, based on costs of performance.]
             270          [(17) If the allocation and apportionment provisions of this chapter do not fairly
             271      represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for
             272      or the commission may require, in respect of all or any part of the taxpayer's business activity, if
             273      reasonable:]
             274          [(a) separate accounting;]
             275          [(b) the exclusion of any one or more of the factors;]
             276          [(c) the inclusion of one or more additional factors which will fairly represent the
             277      taxpayer's business activity in this state; or]
             278          [(d) the employment of any other method to effectuate an equitable allocation and
             279      apportionment of the taxpayer's income.]
             280          Section 4. Effective date.
             281          (1) Except as provided in Subsection (2), this bill takes effect for taxable years


             282      beginning on or after January 1, 2009.
             283          (2) The amendments to Section 59-7-110 have retrospective operation for taxable years
             284      beginning on or after January 1, 2008.


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