2006 Legislation
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HOUSE BILL NO. 442 – Income tax, multistate/unitary corp

HOUSE BILL NO. 442

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Bill Status



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

Bill Text


                                                                        
                                                                        
  ]]]]              LEGISLATURE OF THE STATE OF IDAHO             ]]]]
 Fifty-eighth Legislature                   Second Regular Session - 2006
                                                                        
                                                                        
                              IN 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 and a greater in the same proportion of  that  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 national engineering laboratory,  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 / Fiscal Impact


                      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