Utah recently enacted significant changes to its corporate apportionment methodology for tax years beginning in 2018 and after in two pieces of legislation signed earlier this month. Utah H.B. 293, signed March 26, and Utah S.B. 72, signed March 27, work in tandem to alter the apportionment landscape for many corporate taxpayers in the state, resulting in most multistate corporate taxpayers being subject to a single-sales factor apportionment formula in Utah by 2021.
Historical Classification of Sales-Factor Weighted Taxpayers
Prior to 2014, Utah apportioned income using either an evenly weighted three-factor formula or, at the taxpayer’s election, a three-factor formula with a double-weighted sales factor. In 2014, Utah created a category of taxpayers known as “sales-factor weighted taxpayers” who are required to utilize a singles-sales factor apportionment formula if more than 50 percent of their total sales everywhere are generated by economic activities described in the North America Industry Classification Systems (NAICS).
However, key industries, including mining, manufacturing, transportation, information and finance and insurance, were specifically excluded from the sales-factor weighted taxpayer formula by the statute. Starting in 2016, taxpayers who generate more than 50 percent of sales from computer and electronic product manufacturing, under NAICS Code 334, could elect to be designated as “optional sales-factor weighted taxpayers” and apportion income using a single-sales factor as well.
Single-Sales Factor Formula Revised and Expanded
Solely for tax years in 2018, Utah S.B. 72 creates a new category of “single-sales factor taxpayers” that, as with the sales-factor weighted taxpayer category it temporarily replaces, meets the 50 percent test under a non-excluded NAICS code. However, the group also now includes taxpayers who do not meet the definition of “optional apportionment taxpayers” as discussed below.
Further, H.B. 293 creates another category of “phased-in sales factor weighted taxpayers” that provides a quadruple-weighted sales factor for tax years beginning in 2019, moving to an eight-times weighted sales factor for 2020, and ending with a single-sales factor formula for tax years beginning in 2021 and after. The definition of “phased-in sales factor weighted taxpayer” expands between 2019 and 2020 by pulling in optional apportionment taxpayers who previously used the phased-in sales factor weighted method.
Sales-Factor Weighted Taxpayers Revisited
For tax years beginning in 2019, H.B. 293 goes further by removing single-sales factor taxpayers as a category and re-enacting the sales-factor weighted taxpayer category that was available for tax years prior to 2018. The 50 percent sales test is modified to include additional NAICS codes. Specifically, the following NAICS codes are not excluded from the definition of sales factor weighted taxpayer that is otherwise unavailable to NAICS Sectors 31 – 33, Manufacturing:
Optional Apportionment Taxpayers
Depending on the tax year, most taxpayers going forward will qualify as single-sales factor taxpayers or phased-in sales factor taxpayers. However, Utah creates yet another category of taxpayers, “optional apportionment taxpayers” who will qualify for this category based on the extent of their economic activity in Utah.
If the average of a taxpayer’s property and payroll factor is greater than 0.5, then for tax years beginning in 2018 or after, that taxpayer may elect to apportion income using the traditional three-factor formula. However, such taxpayers may still opt in to the phased-in sales factor weighted method beginning in 2020.
Changes to Property and Payroll Factor for Airlines
For airlines who are “optional apportionment taxpayers,” as described above, in tax years beginning in 2018 or after, Utah has tweaked the calculation of the property and payroll factor to align with the economic activities test applicable to such taxpayers. As a result, only property and payroll attributable to “economic activities that are classified in an excluded NAICs code” are includable in the numerator of each factor.
For airlines that are not optional apportionment taxpayers, the property and payroll factors continue to be calculated under the more traditional UDITPA-like tests of revenue miles by aircraft type and payroll for flight personnel by aircraft type, respectively.
Corporate Tax Rate Lowered Below 5 Percent
The corporate tax rate was also modestly lowered from a flat rate of 5 percent to 4.95 percent for tax years beginning on Jan. 1, 2018 and after. The change applies to all corporate taxpayers and is not dependent on any of the apportionment changes detailed above.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is the single-sales factor phase-in, in light of Utah’s alternative methods and tests, a win or a loss for corporate taxpayers in Utah?
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