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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 - 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
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