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H0442...............................................by REVENUE AND TAXATION INCOME TAX - Amends existing law to provide that sales, for purposes of computing Idaho taxable income of multistate or unitary corporations, other than sales of tangible property, are in this state if the income producing activity is performed both in and outside this state, in the same proportion that the income producing activity is performed in this state, based on costs of performance. 01/23 House intro - 1st rdg - to printing 01/24 Rpt prt - to Rev/Tax
]]]] LEGISLATURE OF THE STATE OF IDAHO ]]]] Fifty-eighth Legislature Second Regular Session - 2006IN THE HOUSE OF REPRESENTATIVES HOUSE BILL NO. 442 BY REVENUE AND TAXATION COMMITTEE 1 AN ACT 2 RELATING TO INCOME TAXES; AMENDING SECTION 63-3027, IDAHO CODE, TO PROVIDE 3 THAT SALES, FOR PURPOSES OF COMPUTING IDAHO TAXABLE INCOME OF MULTISTATE 4 OR UNITARY CORPORATIONS, OTHER THAN SALES OF TANGIBLE PROPERTY ARE IN THIS 5 STATE IF THE INCOME PRODUCING ACTIVITY IS PERFORMED BOTH IN AND OUTSIDE 6 THIS STATE, IN THE SAME PROPORTION THAT THE INCOME PRODUCING ACTIVITY IS 7 PERFORMED IN THIS STATE BASED ON COSTS OF PERFORMANCE AND TO MAKE TECHNI- 8 CAL CORRECTIONS; DECLARING AN EMERGENCY AND PROVIDING RETROACTIVE APPLICA- 9 TION. 10 Be It Enacted by the Legislature of the State of Idaho: 11 SECTION 1. That Section 63-3027, Idaho Code, be, and the same is hereby 12 amended to read as follows: 13 63-3027. COMPUTING IDAHO TAXABLE INCOME OF MULTISTATE OR UNITARY CORPORA- 14 TIONS. The Idaho taxable income of any multistate or unitary corporation 15 transacting business both within and without this state shall be computed in 16 accordance with the rules set forth in this section: 17 (a) As used in this section, unless the context otherwise requires: 18 (1) "Business income" means income arising from transactions and activity 19 in the regular course of the taxpayer's trade or business and includes 20 income from the acquisition, management, or disposition of tangible and 21 intangible property when such acquisition, management, or disposition con- 22 stitutes integral or necessary parts of the taxpayer's trade or business 23 operations. Gains or losses and dividend and interest income from stock 24 and securities of any foreign or domestic corporation shall be presumed to 25 be income from intangible property, the acquisition, management, or dispo- 26 sition of which constitutes an integral part of the taxpayer's trade or 27 business; such presumption may only be overcome by clear and convincing 28 evidence to the contrary. 29 (2) "Commercial domicile" means the principal place from which the trade 30 or business of the taxpayer is directed or managed. 31 (3) "Compensation" means wages, salaries, commissions and any other form 32 of remuneration paid to employees for personal services. 33 (4) "Nonbusiness income" means all income other than business income. 34 (5) "Sales" means all gross receipts of the taxpayer not allocated under 35 subsections (d) through (h) of this section. 36 (6) "State" means any state of the United States, the District of Colum- 37 bia, the Commonwealth of Puerto Rico, any territory or possession of the 38 United States, and any foreign country or political subdivision thereof. 39 (b) Any taxpayer having income from business activity which is taxable 40 both within and without this state shall allocate and apportion such net 41 income as provided in this section. 42 (c) For purposes of allocation and apportionment of income under this 43 section, a taxpayer is taxable in another state if: 2 1 (1) In that state he is subject to a net income tax, a franchise tax mea- 2 sured by net income, a franchise tax for the privilege of doing business, 3 or a corporate stock tax; or 4 (2) That state has jurisdiction to subject the taxpayer to a net income 5 tax regardless of whether, in fact, the state does or does not. 6 (d) Rents and royalties from real or tangible personal property, capital 7 gains interest, dividends, or patent or copyright royalties, to the extent 8 that they constitute nonbusiness income, shall be allocated as provided in 9 subsections (e) through (h) of this section. Allocable nonbusiness income 10 shall be limited to the total nonbusiness income received which is in excess 11 of any related expenses which have been allowed as a deduction during the tax- 12 able year. In the case of allocable nonbusiness interest or dividends, related 13 expenses include interest on indebtedness incurred or continued to purchase or 14 carry assets on which the interest or dividends are nonbusiness income. 15 (e) (1) Net rents and royalties from real property located in this state 16 are allocable to this state. 17 (2) Net rents and royalties from tangible personal property are allocable 18 to this state: 19 (i) if and to the extent that the property is utilized in this 20 state, or 21 (ii) in their entirety if the taxpayer's commercial domicile is in 22 this state and the taxpayer is not organized under the laws of or 23 taxable in the state in which the property is utilized. 24 (3) The extent of utilization of tangible personal property in a state is 25 determined by multiplying the rents and royalties by a fraction, the 26 numerator of which is the number of days of physical location of the prop- 27 erty in the state during the rental or royalty period in the taxable year 28 and the denominator of which is the number of days of physical location of 29 the property everywhere during all rental or royalty periods in the tax- 30 able year. If the physical location of the property during the rental or 31 royalty period is unknown or unascertainable by the taxpayer, tangible 32 personal property is utilized in the state in which the property was 33 located at the time the rental or royalty payer obtained possession. 34 (f) (1) Capital gains and losses from sales of real property located in 35 this state are allocable to this state. 36 (2) Capital gains and losses from sales of tangible personal property are 37 allocable to this state if: 38 (i) the property had a situs in this state at the time of the sale, 39 or 40 (ii) the taxpayer's commercial domicile is in this state and the tax- 41 payer is not taxable in the state in which the property had a situs. 42 (3) Capital gains and losses from sales of intangible personal property 43 are allocable to this state if the taxpayer's commercial domicile is in 44 this state, unless such gains and losses constitute business income as 45 defined in this section. 46 (g) Interest and dividends are allocable to this state if the taxpayer's 47 commercial domicile is in this state unless such interest or dividends consti- 48 tute business income as defined in this section. 49 (h) (1) Patent and copyright royalties are allocable to this state: 50 (i) if and to the extent that the patent or copyright is utilized by 51 the payer in this state, or 52 (ii) if and to the extent that the patent or copyright is utilized by 53 the payer in a state in which the taxpayer is not taxable and the 54 taxpayer's commercial domicile is in this state. 55 (2) A patent is utilized in a state to the extent that it is employed in 3 1 production, fabrication, manufacturing, or other processing in the state 2 or to the extent that a patent product is produced in the state. If the 3 basis of receipts from patent royalties does not permit allocation to 4 states or if the accounting procedures do not reflect states of utiliza- 5 tion, the patent is utilized in the state in which the taxpayer's commer- 6 cial domicile is located. 7 (3) A copyright is utilized in a state to the extent that printing or 8 other publication originates in the state. If the basis of receipts from 9 copyright royalties does not permit allocation to states or if the 10 accounting procedures do not reflect states of utilization, the copyright 11 is utilized in the state in which the taxpayer's commercial domicile is 12 located. 13 (i) (1) Notwithstanding the election allowed in Article III.1 of the 14 multistate tax compact enacted as section 63-3701, Idaho Code, all busi- 15 ness income shall be apportioned to this state under subsection (j) of 16 this section by multiplying the income by a fraction, the numerator of 17 which is the property factor plus the payroll factor plus two (2) times 18 the sales factor, and the denominator of which is four (4), except as pro- 19 vided in paragraph (2) of this subsection. 20 (2) If a corporation, or a parent corporation of a combined group filing 21 a combined report under sections 63-3027 and 63-3701, Idaho Code, is an 22 electrical corporation as defined in section 61-119, Idaho Code, or is a 23 telephone corporation as defined in section 62-603, Idaho Code, all busi- 24 ness income of the corporation shall be apportioned to this state by mul- 25 tiplying the income by a fraction, the numerator of which is the property 26 factor plus the payroll factor plus the sales factor, and the denominator 27 of which is three (3). 28 (j) (1) In the case of a corporation or group of corporations combined 29 under subsection (t) of this section, Idaho taxable income or loss of the 30 corporation or combined group shall be determined as follows: 31 (i) from the income or loss of the corporation or combined group of 32 corporations, subtract any nonbusiness income, and add any 33 nonbusiness loss, included in the total, 34 (ii) multiply the amounts determined under paragraph (1)(i) of this 35 subsection by the Idaho apportionment percentage defined in subsec- 36 tion (i) of this section, taking into account, where applicable, the 37 property, payroll and sales of all corporations, wherever incorpo- 38 rated, which are included in the combined group. The resulting prod- 39 uct shall be the amount of business income or loss apportioned to 40 Idaho. 41 (2) To the amount determined as apportioned business income or loss under 42 paragraph (1)(ii) of this subsection, add nonbusiness income allocable 43 entirely to Idaho under the provisions of this section or subtract 44 nonbusiness loss allocable entirely to Idaho under this section. The 45 resulting sum is the Idaho taxable income or loss of the corporation. 46 (3) In the case of a corporation not subject to subsection (t) of this 47 section, the income or loss referred to in paragraph (1)(i) of this sub- 48 section, shall be the taxable income of the corporation after making 49 appropriate adjustments under the provisions of section 63-3022, Idaho 50 Code. 51 (k) The property factor is a fraction, the numerator of which is the 52 average value of the taxpayer's real and tangible personal property owned or 53 rented and used in this state during the tax period and the denominator of 54 which is the average value of all the taxpayer's real and tangible personal 55 property owned or rented and used during the tax period. 4 1 (l) Property owned by the taxpayer is valued at its original cost. Prop- 2 erty rented by the taxpayer is valued at eight (8) times the net annual rental 3 rate. Net annual rental rate is the annual rental rate paid by the taxpayer 4 less any annual rental rate received by the taxpayer from subrentals. 5 (m) The average value of property shall be determined by averaging the 6 values at the beginning and ending of the tax period, but the state tax com- 7 mission may require the averaging of monthly values during the tax period if 8 reasonably required to reflect properly the average value of the taxpayer's 9 property. 10 (n) The payroll factor is a fraction, the numerator of which is the total 11 amount paid in this state during the tax period by the taxpayer for compensa- 12 tion, and the denominator of which is the total compensation paid everywhere 13 during the tax period. 14 (o) Compensation is paid in this state if: 15 (1) The individual's service is performed entirely within the state; or 16 (2) The individual's service is performed both within and without the 17 state, but the service performed without the state is incidental to the 18 individual's service within the state; or 19 (3) Some of the service is performed in the state and 20 (i) the base of operations or, if there is no base of operations, 21 the place from which the service is directed or controlled is in the 22 state, or 23 (ii) the base of operations or the place from which the service is 24 directed or controlled is not in any state in which some part of the 25 service is performed, but the individual's residence is in this 26 state. 27 (p) The sales factor is a fraction, the numerator of which is the total 28 sales of the taxpayer in this state during the tax period, and the denominator 29 of which is the total sales of the taxpayer everywhere during the tax period. 30 (q) Sales of tangible personal property are in this state if: 31 (1) The property is delivered or shipped to a purchaser, other than the 32 United States government, within this state regardless of the f.o.b. point 33 or other conditions of the sale, or 34 (2) The property is shipped from an office, store, warehouse, factory, or 35 other place of storage in this state and 36 (i) the purchaser is the United States government or 37 (ii) the taxpayer is not taxable in the state of the purchaser. 38 (r) Sales, other than sales of tangible property, are in this state, if: 39 (1) The income-producing activity is performed in this state; or 40 (2) The income-producing activity is performed both in and outside this 41 state anda greaterin the same proportionofthat the income-producing 42 activity is performed in this state,than in any other state,based on 43 costs of performance, notwithstanding the election allowed in Article 44 III.1 of the multistate tax compact enacted as section 63-3701, Idaho 45 Code. 46 (s) If the allocation and apportionment provisions of this section do not 47 fairly represent the extent of the taxpayer's business activity in this state, 48 the taxpayer may petition for or the state tax commission may require, in 49 respect to all or any part of the taxpayer's business activity, if reasonable: 50 (1) Separate accounting, provided that only that portion of general 51 expenses clearly identifiable with Idaho business operations shall be 52 allowed as a deduction; 53 (2) The exclusion of any one (1) or more of the factors; 54 (3) The inclusion of one (1) or more additional factors which will fairly 55 represent the taxpayer's business activity in this state; or 5 1 (4) The employment of any other method to effectuate an equitable alloca- 2 tion and apportionment of the taxpayer's income. 3 (t) For purposes of this section and sections 63-3027B through 63-3027E, 4 Idaho Code, the income of two (2) or more corporations, wherever incorporated, 5 the voting stock of which is more than fifty percent (50%) owned directly or 6 indirectly by a common owner or owners, when necessary to accurately reflect 7 income, shall be allocated or apportioned as if the group of corporations were 8 a single corporation, in which event: 9 (1) The Idaho taxable income of any corporation subject to taxation in 10 this state shall be determined by use of a combined report which includes 11 the income, determined under subparagraph (2) of this subsection, of all 12 corporations which are members of a unitary business, allocated and appor- 13 tioned using apportionment factors for all corporations included in the 14 combined report and methods set out in this section. The use of a combined 15 report does not disregard the separate corporate identities of the members 16 of the unitary group. Each corporation which is transacting business in 17 this state is responsible for its apportioned share of the combined busi- 18 ness income plus its nonbusiness income or loss allocated to Idaho, minus 19 its net operating loss carryover or carryback. 20 (2) The income of a corporation to be included in a combined report shall 21 be determined as follows: 22 (i) for a corporation incorporated in the United States or included 23 in a consolidated federal corporation income tax return, the income 24 to be included in the combined report shall be the taxable income for 25 the corporation after making appropriate adjustments under the provi- 26 sions of section 63-3022, Idaho Code; 27 (ii) for a corporation incorporated outside the United States, but 28 not included in subsection (t)(2)(i) of this section, the income to 29 be included in the combined report shall be the net income before 30 income taxes of such corporation stated on the profit and loss state- 31 ments of such corporation which are included within the consolidated 32 profit and loss statement prepared for the group of related corpora- 33 tions of which the corporation is a member, which statement is pre- 34 pared for filing with the United States securities and exchange com- 35 mission. If the group of related companies is not required to file 36 such profit and loss statement with the United States securities and 37 exchange commission, the profit and loss statement prepared for 38 reporting to shareholders and subject to review by an independent 39 auditor may be used to obtain net income before income taxes. In the 40 alternative, and subject to reasonable substantiation and consistent 41 application by the group of related companies, adjustments may be 42 made to the profit and loss statements of the corporation incorpo- 43 rated outside the United States, if necessary, to conform such state- 44 ments to tax accounting standards as required by the Internal Revenue 45 Code as if such corporation were incorporated in the United States 46 and required to file a federal income tax return, subject to appro- 47 priate adjustments under the provisions of section 63-3022, Idaho 48 Code; and 49 (iii) if the income computation for a group under paragraphs (i) and 50 (ii) of this subsection results in a loss, such loss shall be taken 51 into account in other years, subject to the provisions of subsections 52 (b) and (c) of section 63-3022, Idaho Code. 53 (u) If compensation is paid in the form of a reasonable cash fee for the 54 performance of management services directly for the United States government 55 at the Idaho nationalengineeringlaboratory, separate accounting for that 6 1 part of the business activity without regard to other activity of the taxpayer 2 in the state of Idaho or elsewhere shall be required; provided that only that 3 portion of general expenses clearly identifiable with Idaho business opera- 4 tions of that activity shall be allowed as a deduction. 5 SECTION 2. An emergency existing therefor, which emergency is hereby 6 declared to exist, this act shall be in full force and effect on and after its 7 passage and approval, and retroactively to January 1, 2006.
STATEMENT OF PURPOSE RS 15368 This bill modifies the sales factor of the three-factor formula by which multistate corporations apportion business income to Idaho for computing income tax. For sales of other than tangible personal property, gross receipts are included in the numerator of the factor in the same proportion that the costs of performing that sale are in this state. Under current law, all receipts are included in the numerator if the greater cost of performance is within this state but no receipts are included in the numerator if the greater costs of performance are outside this state, even though there may be costs of performance in this state. FISCAL NOTE $500,000 increase to state general fund. CONTACT Name: Ted Spangler Agency: State Tax Commission Phone: 334-7530 STATEMENT OF PURPOSE/FISCAL NOTE H 442