Representative Daniel McCay proposes the following substitute bill:


1     
SALES FACTOR WEIGHTED TAX MODIFICATIONS

2     
2017 GENERAL SESSION

3     
STATE OF UTAH

4     
Chief Sponsor: Wayne A. Harper

5     
House Sponsor: Daniel McCay

6     

7     LONG TITLE
8     General Description:
9          This bill modifies the business income apportionment provisions.
10     Highlighted Provisions:
11          This bill:
12          ▸     defines terms;
13          ▸     describes how a taxpayer determines whether greater than 50% of the taxpayer's
14     economic activities are classified within particular NAICS codes;
15          ▸     requires that, for a taxable year beginning on or after January 1, 2018, a taxpayer
16     that apportions business income using the single sales factor method continue to use
17     the single sales factor method of apportionment;
18          ▸     provides the circumstances where a taxpayer that previously apportioned business
19     income using the single sales factor method may change the method of
20     apportionment;
21          ▸     provides rulemaking authority to the State Tax Commission; and
22          ▸     requires the State Tax Commission to conduct a study related to the apportionment
23     of business income.
24     Money Appropriated in this Bill:
25          None
26     Other Special Clauses:
27          This bill provides a special effective date.
28          This bill provides a repeal date.
29          This bill provides a coordination clause.
30     Utah Code Sections Affected:
31     AMENDS:
32          59-7-302, as last amended by Laws of Utah 2016, Chapters 311 and 368
33          59-7-311, as last amended by Laws of Utah 2016, Chapters 311 and 323
34     Utah Code Sections Affected by Coordination Clause:
35          59-7-302, as last amended by Laws of Utah 2016, Chapters 311 and 368
36     Uncodified Material Affected:
37     ENACTS UNCODIFIED MATERIAL
38     

39     Be it enacted by the Legislature of the state of Utah:
40          Section 1. Section 59-7-302 is amended to read:
41          59-7-302. Definitions.
42          (1) As used in this part, unless the context otherwise requires:
43          (a) "Aircraft type" means a particular model of aircraft as designated by the
44     manufacturer of the aircraft.
45          (b) "Airline" means the same as that term is defined in Section 59-2-102.
46          (c) "Airline revenue ton miles" means, for an airline, the total revenue ton miles during
47     the airline's tax period.
48          (d) "Business income" means income arising from transactions and activity in the
49     regular course of the taxpayer's trade or business and includes income from tangible and
50     intangible property if the acquisition, management, and disposition of the property constitutes
51     integral parts of the taxpayer's regular trade or business operations.
52          (e) "Commercial domicile" means the principal place from which the trade or business
53     of the taxpayer is directed or managed.
54          (f) "Compensation" means wages, salaries, commissions, and any other form of
55     remuneration paid to employees for personal services.
56          (g) (i) "Excluded NAICS code" means a NAICS code of the 2002 or 2007 North
57     American Industry Classification System of the federal Executive Office of the President,
58     Office of Management and Budget, within:
59          (A) NAICS Sector 21, Mining;
60          (B) NAICS Industry Group 2212, Natural Gas Distribution;
61          (C) except as provided in Subsection (1)(g)(ii), NAICS Sector 31-33, Manufacturing;
62          (D) NAICS Sector 48-49, Transportation and Warehousing;
63          (E) except as provided in Subsection (1)(g)(ii), NAICS Sector 51, Information; or
64          (F) NAICS Sector 52, Finance and Insurance.
65          (ii) "Excluded NAICS code" does not include a NAICS code of the 2002 or 2007 North
66     American Industry Classification System of the federal Executive Office of the President,
67     Office of Management and Budget, within:
68          (A) NAICS Subsector 333, Machinery Manufacturing;
69          (B) NAICS Subsector 334, Computer and Electronic Product Manufacturing; or
70          (C) NAICS Subsector 519, Other Information Services.
71          (h) "Included NAICS code" means a NAICS code of the 2002 or 2007 North American
72     Industry Classification System of the federal Executive Office of the President, Office of
73     Management and Budget, that is not an excluded NAICS code.
74          [(g)] (i) (i) Except as provided in Subsection (1)[(g)](i)(ii), "mobile flight equipment"
75     [is as] means the same as that term is defined in Section 59-2-102.
76          (ii) "Mobile flight equipment" does not include:
77          (A) a spare engine; or
78          (B) tangible personal property described in Subsection 59-2-102(27) owned by an[: (I)]
79     air charter service[;] or [(II)] air contract service.
80          [(h)] (j) "Nonbusiness income" means all income other than business income.
81          [(i) "Optional sales factor weighted taxpayer" means:]
82          [(i) for a taxpayer that is not a unitary group, regardless of the number of economic
83     activities the taxpayer performs, a taxpayer having greater than 50% of the taxpayer's total sales
84     everywhere generated by economic activities performed by the taxpayer if the economic
85     activities are classified in a NAICS code within NAICS Subsector 334 of the 2002 or 2007
86     North American Industry Classification System of the federal Executive Office of the
87     President, Office of Management and Budget; or]
88           [(ii) for a taxpayer that is a unitary group, a taxpayer having greater than 50% of the
89     taxpayer's total sales everywhere generated by economic activities performed by the taxpayer if
90     the economic activities are classified in a NAICS code within NAICS Subsector 334 of the
91     2002 or 2007 North American Industry Classification System of the federal Executive Office of
92     the President, Office of Management and Budget.]
93          (k) (i) "Qualifying status change" means that an entity with business income:
94          (A) acquires another entity;
95          (B) is acquired by another entity; or
96          (C) merges with another entity.
97          (ii) "Qualifying status change" does not include any change in the structure, ownership,
98     or management of the entity with business income other than a change described in Subsection
99     (1)(k)(i).
100          [(j)] (l) "Revenue ton miles" is determined in accordance with 14 C.F.R. Part 241.
101          [(k)] (m) "Sales" means all gross receipts of the taxpayer not allocated under Sections
102     59-7-306 through 59-7-310.
103          [(l)] (n) [Subject to Subsection (2), "sales] "Sales factor weighted taxpayer" means[:] a
104     taxpayer as determined by Subsection (2)(a).
105          [(i) for a taxpayer that is not a unitary group, regardless of the number of economic
106     activities the taxpayer performs, a taxpayer having greater than 50% of the taxpayer's total sales
107     everywhere generated by economic activities performed by the taxpayer if the economic
108     activities are classified in a NAICS code of the 2002 or 2007 North American Industry
109     Classification System of the federal Executive Office of the President, Office of Management
110     and Budget, except for:]
111          [(A) a NAICS code within NAICS Sector 21, Mining;]
112          [(B) a NAICS code within NAICS Industry Group 2212, Natural Gas Distribution;]
113          [(C) a NAICS code within NAICS Sector 31-33, Manufacturing;]
114          [(D) a NAICS code within NAICS Sector 48-49, Transportation and Warehousing;]
115          [(E) a NAICS code within NAICS Sector 51, Information, except for NAICS Subsector
116     519, Other Information Services; or]
117          [(F) a NAICS code within NAICS Sector 52, Finance and Insurance; or]
118          [(ii) for a taxpayer that is a unitary group, a taxpayer having greater than 50% of the
119     taxpayer's total sales everywhere generated by economic activities performed by the taxpayer if
120     the economic activities are classified in a NAICS code of the 2002 or 2007 North American
121     Industry Classification System of the federal Executive Office of the President, Office of
122     Management and Budget, except for a NAICS code under Subsections (1)(l)(i)(A) through (F).]
123          [(m)] (o) "State" means any state of the United States, the District of Columbia, the
124     Commonwealth of Puerto Rico, any territory or possession of the United States, and any
125     foreign country or political subdivision thereof.
126          [(n)] (p) "Transportation revenue" means revenue an airline earns from:
127          (i) transporting a passenger or cargo; or
128          (ii) from miscellaneous sales of merchandise as part of providing transportation
129     services.
130          [(o)] (q) "Utah revenue ton miles" means, for an airline, the total revenue ton miles
131     within the borders of this state:
132          (i) during the airline's tax period; and
133          (ii) from flight stages that originate or terminate in this state.
134          [(2) The following apply to Subsection (1)(l):]
135          (2) (a) (i) Subject to the other provisions of this Subsection (2), a taxpayer shall [for
136     each taxable year] determine for a taxable year whether the taxpayer is a sales factor weighted
137     taxpayer if the taxpayer is not subject to Subsection 59-7-311(5) .
138          (ii) A taxpayer shall make the determination required by Subsection (2)(a)(i) before the
139     due date for filing the taxpayer's return under this chapter for the taxable year, including
140     extensions.
141          (iii) For purposes of making the determination required by Subsection (2)(a)(i), [total
142     sales everywhere include only the total sales everywhere:] a taxpayer shall determine whether
143     greater than 50% of the taxpayer's economic activities everywhere are classified in included
144     NAICS codes as provided in Subsections (2)(a)(iv) through (vi).
145          [(A) as determined in accordance with this part; and]
146          [(B) made during the taxable year for which a taxpayer makes the determination
147     required by Subsection (2)(a)(i).]
148          (iv) A taxpayer shall calculate the following two fractions, taking into account the
149     taxpayer's establishments and the taxpayer's economic activities everywhere, regardless of
150     whether the taxpayer eliminates intercompany sales or intercompany transactions for other
151     purposes on the taxpayer's income tax return:
152          (A) the fraction reached by making the calculation described in Section 59-7-312,
153     except that the numerator shall be the property everywhere that is attributable to economic
154     activities that are classified in included NAICS codes; and
155          (B) the fraction reached by making the calculation described in Section 59-7-315,
156     except that the numerator shall be the payroll everywhere that is attributable to economic
157     activities that are classified in included NAICS codes.
158          (v) The taxpayer shall calculate an average of the fractions calculated in accordance
159     with Subsection (2)(a)(iv) by:
160          (A) adding together the fractions calculated in accordance with Subsection (2)(a)(iv);
161     and
162          (B) dividing the sum calculated in Subsection (2)(a)(v)(A) by two.
163          (vi) If the average calculated in Subsection (2)(a)(v) is greater than .50, the taxpayer is
164     a sales factor weighted taxpayer.
165          (b) A taxpayer that files a return as a unitary group for a taxable year is considered to
166     be a unitary group for that taxable year.
167          (c) In accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking Act, the
168     commission may define the [term] terms:
169          (i) "economic activity" consistent with the use of the term "activity" in the 2007 North
170     American Industry Classification System of the federal Executive Office of the President,
171     Office of Management and Budget[.]; and
172          (ii) "establishment."
173          Section 2. Section 59-7-311 is amended to read:
174          59-7-311. Method of apportionment of business income.
175          (1) For a taxable year, all business income shall be apportioned to this state by
176     multiplying the business income by a fraction calculated as provided in this section.
177          (2) Subject to the other provisions of this part, a taxpayer, except for a sales factor
178     weighted taxpayer and [an optional sales factor weighted taxpayer,] a taxpayer subject to
179     Subsection (4), shall calculate the fraction for apportioning business income to this state using
180     one of the following fractions:
181          (a) a fraction where:
182          (i) the numerator of the fraction is the sum of:
183          (A) the property factor as calculated under Section 59-7-312;
184          (B) the payroll factor as calculated under Section 59-7-315; and
185          (C) the sales factor as calculated under Section 59-7-317; and
186          (ii) the denominator of the fraction is three; or
187          (b) a fraction where:
188          (i) the numerator of the fraction is the sum of:
189          (A) the property factor as calculated under Section 59-7-312;
190          (B) the payroll factor as calculated under Section 59-7-315; and
191          (C) the sales factor as calculated under Section 59-7-317 multiplied by two; and
192          (ii) the denominator of the fraction is four.
193          (3) Subject to the other provisions of this part, a sales factor weighted taxpayer shall
194     calculate the fraction for apportioning business income to this state using a fraction where:
195          (a) the numerator of the fraction is the sales factor as calculated under Section
196     59-7-317; and
197          (b) the denominator of the fraction is one.
198          [(4) Subject to the other provisions of this part, an optional sales factor weighted
199     taxpayer shall calculate the fraction for apportioning business income to this state using a
200     method described in Subsection (2)(a), (2)(b), or (3).]
201          (4) For a taxable year beginning on or after January 1, 2018, a taxpayer that apportions
202     business income using the method described in Subsection (3) shall continue to apportion
203     business income using the method described in Subsection (3) in subsequent taxable years
204     except as provided in Subsection (5).
205          (5) (a) A taxpayer that is subject to Subsection (4) may make a new determination of
206     the taxpayer's method of apportionment for a taxable year in which a qualifying status change
207     occurs.
208          (b) Once a taxpayer described in Subsection (5)(a) apportions business income using
209     the method described in Subsection (3) after a qualifying status change, the provisions of
210     Subsection (4) apply.
211          [(5)] (6) (a) The taxpayer shall determine the method for calculating the fraction for
212     apportioning business income to this state under this section on or before the due date for filing
213     the taxpayer's return under this chapter for the taxable year, including extensions.
214          (b) The method described in Subsection [(5)] (6)(a) is in effect for the taxable year.
215          [(6)] (7) In accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking
216     Act, the commission may make rules providing procedures for a taxpayer to make the election
217     required by Subsections (2) and (4).
218          Section 3. Apportionment provisions study.
219          (1) On or before September 30, 2017, the Utah State Tax Commission shall conduct a
220     study and make recommendations on the apportionment provisions of 2017 General Session
221     S.B. 229, Sales Factor Weighted Tax Modifications.
222          (2) The Utah State Tax Commission shall present the Utah State Tax Commission's
223     findings and recommendations to the Revenue and Taxation Interim Committee on or before
224     September 30, 2017.
225          Section 4. Effective date.
226          (1) Except as provided in Subsection (2), this bill takes effect for a taxable year
227     beginning on or after January 1, 2018.
228          (2) Uncodified Section 3, Apportionment provisions study, takes effect on May 9,
229     2017.
230          Section 5. Repeal date.
231          Uncodified Section 3, Apportionment provisions study, is repealed on September 30,
232     2017.
233          Section 6. Coordinating S.B. 229 with S.B. 132 -- Substantive and technical
234     amendments.
235          If this S.B. 229 and S.B. 132, Tax Provision Amendments, both pass and become law,
236     it is the intent of the Legislature that on January 1, 2018, the Office of Legislative Research and
237     General Counsel shall prepare the Utah Code database for publication by making the following
238     changes:
239          (1) modifying Subsection 59-7-302(1)(g)(ii) to read:
240          "(ii) "Excluded NAICS code" does not include a NAICS code of the 2002 or 2007
241     North American Industry Classification System of the federal Executive Office of the
242     President, Office of Management and Budget, within:
243          (A) NAICS Subsector 333, Machinery Manufacturing;
244          (B) NAICS Subsector 334, Computer and Electronic Product Manufacturing;
245          (C) NAICS Code 336111, Automobile Manufacturing; or
246          (D) NAICS Subsector 519, Other Information Services.";
247          (2) the amendments to Subsection 59-7-302(1)(n) in this bill supersede the
248     amendments to Subsection 59-7-302(1)(l) in S.B. 132; and
249          (3) the amendments to Subsection 59-7-302(2) in this bill supersede the amendments to
250     Subsection 59-7-302(2) in S.B. 132.