Corporate Close-Up: Mississippi’s Ambiguous Apportionment Rules for Manufacturers

With domestic manufacturing at the forefront of national politics and fierce competition amongst states for manufacturing jobs, state legislatures have created numerous economic incentives to lure those jobs into their states. Mississippi’s general approach has been to offer a variety of income tax credits and sales and property tax exemptions for manufacturers.

Mississippi’s corporate income tax has some unique approaches to multistate taxation that can trip up unaware taxpayers. For example, Mississippi’s tax code lacks a default statutory apportionment formula. Instead, the Commissioner is authorized to create separate apportionment formulas for various types of industries.

Along with a handful of other states, Mississippi has industry-specific apportionment for manufacturers, but the practical effects of its rules run counter to other states that address these taxpayers. Louisiana, Maryland, Massachusetts, New Mexico and Virginia all require manufacturers to produce a tangible product or belong to an NAICS code associated with traditional manufacturing of tangible property in order to qualify as a manufacturer for income tax purposes. As will be seen, these definitions are consistent with the limited guidance available in Mississippi discussed below.

Mississippi Industry Apportionment Regulations

Where Mississippi stands in stark contrast to the states listed above is in the particular formula that is required for manufacturers. The other states all encourage, or at least don’t discourage, in-state manufacturing by allowing manufacturers to use a single-sales factor formula, instead of a default three-factor or double-weighted sales factor formula. In effect, they don’t take into account property or payroll that might be employed in the state when calculating taxable income.

Mississippi, however, requires manufacturers selling at wholesale to use a three-factor income tax apportionment formula and manufacturers selling at retail to use a double-weighted sales factor. On the other hand, Mississippi regulations require financial institutions, pipelines and “manufacturers selling principally at wholesale” to apportion income using an equally weighted three-factor formula based on property, payroll and sales. Contrast this with both “manufacturers selling principally at retail,” who are required to use a double-weighted sales factor formula and “retailers, wholesalers, service companies and lessors,” who use a single-sales factor formula.

However, J Paul Varner, a tax attorney with Butler Snow LLP in Mississippi and co-author of the Bloomberg BNA Mississippi Corporate Income Tax Navigator (subscription required), noted that Mississippi has designed incentives for manufacturers to locate very large manufacturing operations in the state. He added that Mississippi has, under the Mississippi Major Economic Impact Act, statutorily allowed a few manufacturers selling at wholesale to utilize a single sales apportionment factor under Miss. Code § 27-7-30(3)(e).

For taxpayers who otherwise qualify as retailers or service companies and who have little in the way of Mississippi property or payroll, it would likely be advantageous to use the three-factor or double-weighted factor apportionment formula reserved for manufacturers. In-state manufacturers might want to be treated as service companies to reduce the effect of property or payroll employed in the state. But how does a taxpayer determine if they are a manufacturer?

Manufacturers under the Sales Tax and Local Privilege Taxes

Interestingly, the income tax regulations do not provide a direct definition of “manufacturer” for purposes of determining whether a taxpayer qualifies as a manufacturer.

When enacting statutes in other areas of the tax code, the Mississippi provides a definition of manufacturer or manufacturing. For sales tax purposes under Miss. Code Ann. § 27-65-11(a) as well as for local privilege taxes under Miss. Code Ann. § 27-17-3, the tax code contains a detailed definition of “manufacturer.” In these instances, a manufacturer is an entity who predominantly engages in “activities of an industrial or commercial nature wherein labor or skill is applied, by hand or machinery, to materials belonging to the manufacturer so that a new, different, or more useful article of tangible personal property or substance of trade or commerce or electric power is produced for sale or rental and includes the production or fabrication of special-made or custom-made articles for sale or rental.”

The sales tax statute clearly defines terms related to processing, machinery, parts and plants amongst others. The question arises as to whether these definitions apply to the income tax for apportionment purposes. In at least one section of the income tax code relating to the manufacturing investment tax credits, the income tax provisions directly reference that definition of manufacturer contained in the sales tax statute.

Alveno Castilla, also a tax attorney at Butler Snow LLP, and co-author of the Bloomberg BNA Mississippi Corporate Income Tax Navigator (subscription required), told Bloomberg BNA that the state itself makes the determination as to whether certain enterprises are engaged in manufacturing activities that qualify for the major tax incentives under the Mississippi Major Economic Impact Act. Under that act, the decision is left to the Mississippi Major Economic Impact Authority to decide if the enterprise is a “qualified business or industry” as provided in Miss. Code §§ 27-7-30(1)(a) and 57-75-5(f)(xxi).

Mississippi Case Law on Manufacturers

However, the apportionment rules applicable to manufacturers appear to go farther back than these statutes and have their origins in earlier iterations of the Mississippi corporate income and franchise tax.

In 1962, the Mississippi Supreme Court addressed the issue in Reliance Mfg. Co. v. Barr. The taxpayer in this case made men’s clothing and had determined its income attributable to Mississippi under regulations that required manufacturers to use a three-factor formula based on manufacturing assets, manufacturing labor and sales.

The issue in the case was whether the taxpayer was to calculate its manufacturing assets factor by including only assets directly related and actually used in its manufacturing process, or all of its capital assets, including warehouses, automobiles, personal property, and assets not in operation. The court framed its decision on a unitary analysis, holding that only those assets that were employed with the singular purpose of “making and marketing a product” qualified for purposes of the property factor.

In doing so, the court limited the term “manufacturing” to “the system of industry which produces manufactured articles” and “to manufacture” as “the production of articles for use from raw or prepared materials, by giving to these materials new forms, qualities, and properties, or combinations, whether by hand labor or machinery used more especially of production in a large way by machinery, or many hands working co-operatively.” As a result, assets that were not directly related to the production of the clothing and which were related to warehousing, distributing or sales were excluded from the property factor.

Whether or not the statutory definitions in other areas of the tax code or the Mississippi Supreme Court’s previous ruling informs the current definition of manufacturer for apportionment purposes, the existing Mississippi definitions align with traditional notions of manufacturing by focusing on the transformation of raw materials through hand or machinery into a tangible product.

How taxpayers address this issue currently is unclear and further guidance from the state would be welcome for taxpayers in industries that are more common in our modern electronic economy.
Continue the discussion on BNA’s State Tax Group on LinkedIn: Should Mississippi modernize its income tax treatment of manufacturers?


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