Can a multi-state corporate group get Utah to use a different apportionment formula instead of the standard three-factor UDITPA formula when it distorts the group's Utah income?

Plain-English summary

A securities and investment-banking corporate group ("GROUP") was considering opening a call center in Utah through a subsidiary ("COMPANY"), an e-commerce brokerage business. Before committing to the location, the group asked the Utah State Tax Commission for a guarantee that its Utah Corporation Franchise Tax would be calculated using something other than Utah's standard three-factor apportionment formula under the Uniform Division of Income for Tax Purposes Act (UDITPA).

The group argued that the standard formula — which apportions income based on property, payroll, and sales — would badly distort its Utah tax liability. COMPANY's Utah call center activities were low-margin and had no connection to GROUP's much more profitable out-of-state investment-banking activities, but because the two were part of a single unitary business subject to combined reporting, the standard formula would attribute a disproportionate share of the group's income to Utah. The group proposed two fixes: (1) separate accounting, calculating COMPANY's Utah income based only on the call center's direct expenses grossed up by COMPANY's own publicly reported pre-tax profit margin; or (2) modifying the standard formula by adding a fourth apportionment factor for intangible property (securities), reweighting the four factors, and reducing the Utah payroll numerator by 37% to account for COMPANY's lower per-employee revenue compared to GROUP.

The Commission, acting under its authority in Utah Code Ann. § 59-7-320 to alter the UDITPA formula when it doesn't "fairly represent the extent of the taxpayer's business activity" in Utah, granted only part of the request. It refused separate accounting outright, citing its strong support for combined reporting principles for unitary businesses. But it agreed that the standard property factor — which normally counts only tangible property — didn't fairly capture a securities firm's income-producing assets, since GROUP's tangible assets were less than half a percent of total assets while securities made up roughly a quarter. So the Commission allowed the group to include securities held in inventory within the existing property factor, still weighted one-third along with payroll and sales (not as a separate fourth factor). It declined the other formula adjustments the group requested — the fourth factor and the wage-numerator reduction.

Notably, the Commission also disclosed that it planned to initiate rulemaking to propose a generally applicable rule expanding the property factor to include income-producing securities for similarly situated businesses — but because that rulemaking process (with public comment) would take longer than the group's relocation timeline allowed, it gave this specific alternative-apportionment guarantee to the group in the meantime, regardless of what the eventual rule said.

What this means for you

Multi-state corporate groups facing apportionment distortion

If your business is part of a unitary group where the Utah-based operations look nothing like the group's more profitable out-of-state activities, Utah's statutory process under § 59-7-320 lets you petition for a modified formula, but this ruling shows the Commission grants such relief selectively. Separate accounting for an entity within a unitary group is a hard sell — the Commission is on record as strongly favoring combined reporting. You have better odds arguing that a specific factor (like the property factor for a financial/services business with few tangible assets) doesn't fairly capture your income-producing assets, rather than asking to bypass the formula altogether or add new factors and numerator adjustments.

Financial services and securities firms

This ruling recognizes that the standard tangible-property factor poorly represents companies whose value sits mostly in intangible assets (securities, financial instruments) rather than physical plant. If your firm's income-producing assets are predominantly intangible, this ruling is a useful data point that Utah has been willing to expand the property factor to include securities held in inventory — worth raising if you're negotiating your own apportionment relief, though it doesn't establish a general rule and the Commission's contemplated rulemaking on the subject isn't confirmed to have been finalized based on this letter alone.

Accountants and tax professionals handling apportionment disputes

Note the structure of relief here: the Commission distinguished between accepting a request to reinterpret what belongs in an existing factor (property factor including securities) versus rejecting requests to restructure the formula itself (a new fourth factor, reweighting, or a wage-numerator haircut). When advising clients on § 59-7-320 petitions, frame requests as adjustments within the UDITPA framework's existing factors where possible, and be prepared for the Commission to reject separate accounting for entities that are part of a unitary business subject to combined reporting.

Common questions

Q: Did Utah let the group avoid the standard apportionment formula entirely?
A: No. The Commission refused separate accounting and kept the group within the standard three-factor UDITPA structure, but modified what counts in the property factor to include securities held in inventory.

Q: What formula changes did the Commission approve?
A: Only one: securities held in inventory (intangible property used to produce income) could be included in the property factor, which continued to receive a one-third weight alongside payroll and sales — the same as under the standard formula.

Q: What did the Commission reject?
A: It rejected separate accounting for the Utah call center, adding intangible property as a distinct fourth apportionment factor, and reducing the Utah payroll numerator by 37% to reflect lower per-employee revenue at the call center.

Q: Can any business rely on this ruling to include securities in its property factor?
A: Not automatically. This is a private letter ruling binding the Commission only for the specific taxpayer and facts described. The Commission did indicate it planned to pursue rulemaking to potentially extend a similar property-factor treatment to "similarly situated businesses," but that would require its own separate rule adopted through public comment, not reliance on this letter.

Q: What authority let the Commission modify the formula at all?
A: Utah Code Ann. § 59-7-320, which lets a taxpayer petition the Commission for separate accounting, exclusion of factors, inclusion of additional factors, or any other method to achieve an equitable allocation and apportionment of income when the standard formula doesn't fairly represent the taxpayer's business activity in the state.

Citations and references

Statutes:

• Utah Code Ann. § 59-7-320 — authorizes the Tax Commission to alter the standard UDITPA apportionment formula (via separate accounting, exclusion or inclusion of factors, or another equitable method) when it does not fairly represent the extent of a taxpayer's business activity in Utah

Other frameworks referenced (not separately cited by section number in the ruling text): Utah's Uniform Division of Income for Tax Purposes Act (UDITPA) three-factor apportionment formula (property, payroll, sales), and Utah's combined-reporting rules for unitary businesses.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/00-010.htm

Original ruling text

00-010

Response March 23, 2000

REQUEST
LETTER

March 15, 2000

Expeditious Handling
Requested ‑Pending Relocation Transaction

RE: Request for Alternative Apportionment Method

Gentlemen:

The companies listed above
respectfully request that Utah permit an alternative apportionment method to
cure the severe Utah Corporate Franchise Tax distortion resulting from
COMPANY, (COMPANY) proposed Utah call
center. COMPANY's proposed in‑state
activities have no connection with the more profitable out of state activities
of the GROUP group and those in‑state activities result in a significant
overstatement of the group's Utah Net Taxable Income. We believe that the State has the authority to cure this
distortion.

We request that the State
process this request in an expeditious manner as COMPANY. has a significant
pending corporate relocation transaction.

We believe that either of the
following alternatives will significantly reduce the distortion created by the
call center. We propose that the State
allow the addition of a fourth factor to the standard three factor apportionment
fraction with an adjustment to the relative weight of the three original
factors and an adjustment of the Utah payroll numerator to account for the per
capita revenue for COMPANY and GROUP staff.
Alternatively, we request that the State allow the group to employ
separate accounting, based on the direct expenses of the proposed Utah call
center, using a gross profit percentage based on COMPANY's publicly reported
pre‑tax profit margin to determine the amount of Utah Net Taxable Income.

General Overview of COMPANY's
Activities

COMPANY (formerly known as
NAME) was founded in 1988 as a division of CORPORATION. In 1997, we formed
COMPANY. as a separate entity. In May
1999, GROUP issued tracking stock that tracks the performance of the COMPANY business group. We are required to
separately account for the activities of COMPANY as they in essence have minority shareholders, we therefore publicly
issue separate audited financial statements. COMPANY has separate corporate
headquarters in STATE, a dedicated and separate management team and its own
separate Board of Directors.

COMPANY's business, profit
margins and employees are unique to its business, and dramatically different
from the balance of the group. COMPANY
as an e‑commerce company is a clear example of the current state of the Anew economy".
It is a high cost, high volume and low profit margin business.

SPECIFIC INFO COMPANY,
SPECIFIC INFO. Since 1997, we have
successfully and significantly increased our assets, new accounts, daily trade
activity and customer base each year. Our headcount, one clear measurement of
our growth, doubled in 1999 and we anticipate that to occur again this
year. We are adding customers at the
rate of ##### per day and have added ##### to our staff since January 1,
2000. As COMPANY is investing its
profits in its business, its profitably and its profit margins are not nearly
as high as GROUP=s more mature businesses.

In order to continue to grow
and service our business, we need to create an additional call center/
processing center. The call center will
initially consist of investor service representatives that will provide account
assistance and answer questions from customers throughout the United States. The facility would have three primary
functions: inbound call center for COMPANY, Select Client Sales Office,
Technology Help Desk and a Training and Development Center. The primary
criteria to identify a location for that center were: available, educated labor
pool; sophisticated technology infrastructure; attractive lease and operating
rates. Several cities were presented to
the firm that met our criteria. After much research, visits to each site and
multiple meetings with state and local leaders, we chose CITY, UTAH as our
first choice for COMPANY's Western Call Center. We are currently negotiating with PLACE in CITY, Utah to be the
sole occupant of a FACILITY facility.

Our business plans indicate
the need to hire ##### people in 2000 and an additional ##### people in
2001. Naturally, business conditions
could create a need to adjust our estimates.

When completed and fully
occupied, the center has the ability to employ ##### associates, primarily
recent college graduates who will be trained to acquire their brokerage
licenses and embark on a career in financial services. It is our intention to move very few
associates to Utah, rather we are committed to hiring people from the local
community. Finally, committed to
education, all our associates receive significant training and must participate
in a minimum of twenty hours continuing education each year. The firm also offers tuition reimbursement
to all associates and has a competitive compensation and benefits plan that
includes base salary, incentive compensation, profit sharing and stock
options. Employee contributed medical
and dental plans are available on the first day of employment.

General Overview of GROUP's
Activities

GROUP is a leading integrated
investment and merchant bank serving institutional, corporate, government and
individual clients. GROUP's businesses include securities underwriting; sales
and trading; investment and merchant banking; financial advisory services;
investment research; venture capital; correspondent brokerage services; online,
interactive brokerage services; and asset management. GROUP serves a diverse and demanding universe of domestic and
international clients. The company's
world headquarters are in CITY, and they also have a significant presence in
STATE, STATE and STATE. We have no office nor employees in Utah. GROUP's business groups operate on
significantly higher margins than COMPANY.
COMPANY's Utah office will, when compared to GROUP, have a much higher
percentage of support staff, as compared to executive staff. The executives in
our organization are the revenue producers. The support staff perform the
support and clerical functions and are generally not revenue producers.

The activities of the higher
margin businesses of the unitary group are outside of Utah. The lower margin business of COMPANY would
be conducted in Utah. As a result of
this mix of business activities, the standard three factor formula
significantly distorts the income apportionable to Utah. Use of the three‑factor
formula results in apportioning income to Utah that has no reasonable
relationship to the activity conducted there.

Inclusion of Securities in
the Apportionment Fraction

Pursuant to Title 59 Chapter
7 Section 320 of the of the Utah Code, a taxpayer may petition the Commission
for separate accounting; the exclusion of any one or more of the factors; the
inclusion of one or more additional factors which will fairly represent the
taxpayer's business activity in the State; or the employment of any other
method to effectuate an equitable allocation and apportionment of the
taxpayer's income.

Apportionment of the group=s income using the business allocation factors
provided for in the Utah Code results in distortion since no consideration is
given to the assets of the unitary group that generate the income. The unitary
business apportionment method apportions the total income of a unitary business
"between the taxing jurisdiction and the rest of the world on the basis of
a formula taking into account objective measures of the corporation's activities
within and without the jurisdiction."
An apportionment formula must be "externally consistent;" that
is, "the factor or factors used in the apportionment formula must actually
reflect a reasonable sense of how income is generated."

Securities firms do not earn
significant profits from their physical plant (tangible assets) as would a
manufacturer or retailer. As of
December 31, 1999, GROUP's tangible assets represented less than one‑half
of one percent of its total assets, while securities (which include securities
we hold as inventory) represented approximately twenty five percent of the
companies total assets. Securities firms earn their profits from their
intangible assets (those assets are our inventories) and human resources. The
traditional tangible based property factor does not fairly apportion a
financial or service based firm's income.
Therefore, to more accurately reflect the unitary group's tax base, it
is essential that income‑producing property be included in the
apportionment factor, as those are the assets that result in our income.

In order to more accurately
reflect the group's Utah business activities and apportionable income, we
respectfully request the Commission to exercise its authority under the Utah
Code that allows for the employment of any other method to effectuate an
equitable allocation and apportionment of the taxpayer's income. We request
that a fourth factor, intangible property (i.e. securities) be included in the
Utah factor apportionment, and be given a 50% weight with tangible property,
wages and sales representing the other 50%.
We believe that a 50% weight is appropriate for the intangible factor as
approximately 50% of our revenues are derived from intangible assets.

Wage Fraction Numerator Adjustment

To take into consideration
the profit margins of the different businesses, we request that the State
adjust the wage fraction to reflect the differences in the demographics of the
proposed Utah employees as compared to GROUP's employees. We request that the numerator of the wage
fraction be reduced by 37% to account for the higher per capita revenue of the
GROUP group of employees as compared to COMPANY's employees.

Approximate average revenue
per employee for 1999 was:

GROUP $$$$$

COMPANY $$$$$

COMPANY employees generate
$$$$$ of revenue per employee; while GROUP employees generate $$$$$ of revenue
per employee. This results in COMPANY=s lower profit margins. To correct this, the wage fraction can be adjusted to account for
the lower revenue per employee.

Alternative Proposal ‑Separate
Accounting

Alternatively, we propose
that the group=s Net Taxable Income be calculated based on a separate
accounting of Utah call center's contribution to the group. The annual direct
expenses of the call center (including for example compensation and benefits,
technology, occupancy, depreciation, communications and other direct costs)
would be grossed up by COMPANY=s publicly
reported pre‑tax profit margin, for that calendar year, to arrive at
their "deemed revenue contribution".
We would then subtract the direct costs from the deemed revenue
contribution to arrive at the group=s
Net Taxable Income and Utah franchise tax.

Attachments

We have attached
performance Utah Franchise Tax
calculations for the following methods:

(1) Combined vs. Separate Company

(2) Apportionment Fraction

(3) Separate Accounting

Summary

We respectfully request that
the Commission review our request for the use of an alternative method that
will equitably reflect company's Utah business activities.

Should the State require any
additional information to grant this request, do not hesitate to contact NAME,
Tax Manager at ##### or NAME, Chief Administrative Officer at #####.

Thank you in advance for your
time and consideration given to this matter and your prompt consideration of
our request.

NAME

RESPONSE
LETTER

March
23, 2000

NAME

ADDRESS

RE: GROUP -
Request for Alternative Apportionment Method

Dear NAME,

You
have informed us that COMPANY. (ACOMPANY@), a subsidiary of GROUP. (AGROUP@), is
considering to locate a call center in Utah.
Should COMPANY decide to locate this call center in Utah, COMPANY would
have nexus with Utah for Utah Corporation Franchise Tax purposes. Because COMPANY and GROUP are evidently
conducting a unitary business, they would be subject to the combined reporting
provisions contained within Utah=s
Corporation Franchise Tax. For purposes
of this tax, Utah uses the Uniform Division of Income for Tax Purposes Act (AUDITPA@) three-factor
apportionment formula to apportion income.

Before
COMPANY makes its decision to locate in Utah, you desire a guarantee that any
resulting Utah Corporation Franchise Tax liability for GROUP and COMPANY will
be calculated in a different manner than currently provided for using the
statutory UDITPA three-factor apportionment formula. Therefore, you request that the Utah State Tax Commission issue a
letter ruling allowing GROUP and COMPANY to use an alternative apportionment
formula to determine their Utah Corporation Franchise Tax, should COMPANY
actually locate in Utah. You state that
such a request is justified because the application of Utah=s statutory UDITPA three-factor apportionment formula
to apportion GROUP and COMPANY=s unitary
business income would result in a distortion of the income that is attributed
to COMPANY=s activities in Utah.

Under
Utah Code Ann.'59-7-320, the Tax Commission is authorized to alter
the UDITPA three-factor apportionment formula when that formula does not Afairly represent the extent of the taxpayer=s business activity@ in
Utah. Claiming the statutory formula
would not fairly represent GROUP and COMPANY=s
business activities in Utah, you propose two alternative apportionment methods
for the Tax Commission to consider. One
method would employ separate accounting for GROUP and COMPANY in determining
the amount of Utah Net Taxable Income.
The second method would add a fourth factor to the standard three-factor
apportionment formula, adjust the relative weight of the factors currently
present in the formula, and provide for an adjustment to the Utah payroll
numerator in the wage factor. We shall
address each proposed method separately.

Separate
Accounting. From the information supplied, the Tax Commission believes that
GROUP and COMPANY comprise a unitary business for Utah Corporation Franchise
Tax purposes. The Tax Commission
strongly supports the principles of combined reporting for UDITPA. Thus, we are reluctant to employ separate
accounting methods to determine the Utah Corporation Franchise Tax liability of
an entity that is part of a unitary business.
Accordingly, the Tax Commission does not agree that GROUP and COMPANY
may use separate accounting to determine any potential Utah Corporation
Franchise Tax liability for COMPANY.

Adjustments
to the Apportionment Formula. The securities held by GROUP and COMPANY to
produce income are intangible property.
One of the three factors in the statutory UDITPA formula, the property
factor, includes tangible property inventories, but excludes intangible
property inventories. For an industry
such as yours, the Tax Commission finds merit in adjusting the statutory UDITPA
three-factor apportionment formula to include securities used to produce income
in the property factor portion of the formula.

However,
we believe such an adjustment should apply to all businesses similarly
situated. Accordingly, the Tax
Commission will initiate a rulemaking hearing to propose a rule that may apply
only to similarly situated businesses.
In this rule, we will propose that the property factor, as one of the
three factors in the current UDITPA formula, be expanded to include securities
used to produce income. Nevertheless,
before a hearing can be held and the proposed rule enacted, the rule must
proceed through a public comment period.
Accordingly, any rule we propose cannot become effective until well
after the time you plan to make your decision to locate in Utah. Also, until a rule is adopted, that proposed
rule is subject to modification.

We
realize that you desire an immediate response to your request to alter the
statutory UDITPA formula and that our plan to propose and adopt the
above-mentioned rule would not offer guarantees on which to base your immediate
location decision. Therefore,
regardless of the provisions enacted in the proposed rule, we will allow GROUP
and COMPANY to use an alternative apportionment formula, as described below, to
determine their Utah Corporation Franchise Tax, should COMPANY actually locate
in Utah. We will allow GROUP and
COMPANY to include in the property factor of the three-factor UDITPA apportionment
formula the securities held in inventory.
This more inclusive property factor would still receive a one-third
weight in the apportionment formula, the same weight as both the payroll and
sale factors.

We
do not agree to the other UDITPA formula adjustments you request. However, any party may propose that these or
other adjustments be included in the proposed rule. No rule will be adopted until all proposals are considered by the
Tax Commission. Should a rule be
adopted that is more beneficial to GROUP and COMPANY than the guarantee given
above, GROUP and COMPANY may instead have their Utah Corporation Franchise Tax
determined by the rule.

Should
you have any other questions, please contact us.

For
the Commission,

Pam
Hendrickson

Commission
Chair

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