Does an out-of-state finance company with two Utah-based sales employees, but no Utah office or property, owe Utah corporate franchise/income tax?

Plain-English summary

A California corporation that buys retail motor vehicle installment contracts (auto loan paper) from Utah car dealers asked the Utah State Tax Commission whether it owed Utah corporate income tax. The company argued it shouldn't: all loan contracts are finally approved in California, it owns no property in Utah, all contracts are resold within 30 days to other financial institutions, and it has no more than two Utah-based employees who work from home (no office) contacting dealerships to promote its finance program — with no authority to actually approve any loan.

The Commission ruled the company does have Utah nexus for income tax purposes, for one dispositive reason: it has two employees working in Utah, and Public Law 86-272 (the federal law that shields out-of-state sellers from state income tax when their only in-state activity is soliciting orders for tangible goods) does not cover the kind of activities this company's employees perform. Because of that nexus:

• The company must include the wages/compensation paid to its Utah employees in the payroll factor of Utah's UDITPA apportionment formula (§ 59-7-315).
• Whether any of the company's gross receipts belong in Utah's sales factor turns on a cost-of-performance test: which state (Utah or California) bears the greater share of the cost of producing the income from the Utah contracts. The Commission couldn't resolve this from the facts given — it noted the relevant costs likely include the cost of purchasing/originating the Utah contracts (including dealer commissions) plus the Utah sales force's payroll, and if those costs are the larger share of the total, the Utah-contract receipts must be attributed to Utah.
• As a corporation qualified to do business in Utah with nexus, the company must file a Utah corporate franchise tax return using the UDITPA apportionment formula, and pay at least the $100 statutory minimum franchise tax (§ 59-7-104) even in years its apportioned income comes out to zero.
• The Commission couldn't advise on non-tax filings (like Department of Commerce annual reports), since that's outside its jurisdiction.

What this means for you

Out-of-state lenders, finance companies, and loan originators with Utah-based sales staff

Even a single home-based employee soliciting business relationships (not sales of tangible goods) in Utah can create income tax nexus. This is a strong example of how narrow P.L. 86-272's protection is: it only shields solicitation of orders for tangible personal property, not financial/service activities like promoting a loan-purchase program to dealers.

Multi-state companies weighing "no Utah office" as protection

Owning no property and having no formal office in Utah did not prevent nexus here. The presence of employees performing business activities in the state was enough on its own.

Accountants apportioning income for finance/lending clients

The sales-factor question in this ruling wasn't fully resolved — it's a fact-intensive cost-of-performance analysis. If you have a similar client, you'll need to actually total the costs of originating/servicing the in-state contracts versus the out-of-state approval/back-office costs to determine which state's numerator captures the receipts.

Common questions

Q: We have no office and no property in Utah — can we still have nexus?
A: Yes, according to this ruling. The Commission found nexus based solely on having employees working in Utah; property ownership wasn't required.

Q: Does Public Law 86-272 protect our Utah sales activity?
A: Only if your in-state activity is limited to soliciting orders for sales of tangible personal property that are approved and filled from outside the state. This ruling found P.L. 86-272 didn't apply to a finance company's dealer-relationship and loan-promotion activities.

Q: If none of our income is ultimately sourced to Utah, do we still have to file a return?
A: Yes — the ruling states the company must file a Utah corporate franchise tax return using the apportionment formula and pay at least the $100 minimum franchise tax, regardless of how the sales factor nets out.

Q: Does this ruling bind the Commission for a company in a similar situation?
A: No. This is a private letter ruling for one taxpayer's specific facts and can't be relied on as binding by any other taxpayer, though it may carry weight in a later appeal depending on how closely the facts match.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-7-315 (UDITPA payroll factor)
• Utah Code Ann. § 59-12-319; Utah Admin. R. R865-6F-8 (sales factor / cost-of-performance sourcing, as cited in the ruling)
• Utah Code Ann. § 59-7-104; Utah Admin. R. R865-6F-6 ($100 minimum corporate franchise tax)
• Public Law 86-272 (federal limit on state income tax jurisdiction over interstate solicitation)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/96-051.htm

Original ruling text

96-051

Response
April 9, 1996

Request

February
29, 1996

IN
RE: XXXXX

Dear
Sir/Madam:

This
company, XXXXX, would like to obtain a ruling regarding the applicability of
Utah Corporate Income Tax Law, i.e. the filing of state corporate income tax
returns and tax liability.

XXXXX,
a California corporation, is qualified to do business as a foreign corporation
in the state of Utah, evidenced by the issuance of a Certificate of Authority
on XXXXX. All applicable (if required) sales finance and/or consumer credit
licences have been issued.

The
following is relevant information in making a decision regarding the
applicability of state income taxes:

1) XXXXX is a California
corporation;

2) XXXXX has been issued a
Certificate of Authority to conduct business in Utah as a foreign corporation;

3) XXXXX has no more than 2
employees who reside in the state of Utah (see employee activity description
below);

4) XXXXX owns no property within the
state of Utah;

5) XXXXX has a sales force based in
California which may visit automobile dealerships from time to time, both in
person and telephonically; XXXXX may also utilize the services of authorized
corporations as sub-originators.

XXXXX
is in the business of purchasing retail motor vehicle installment contracts
(commercial paper) from auto dealers in the state of Utah as it does in other
states. Final approval of said vehicle installment sales contracts will be
given in the state of California after all necessary documents are received at
XXXXX's California principal office.

XXXXX
will also purchase retail motor vehicle installment contracts (commercial
paper) from suboriginators who will have contacts and contracts with auto
dealers in the state of Utah. Final approval of said vehicle installment
contracts will be given in the state of California after all necessary
documents are received at XXXXX's principal office in California.

All
contracts that are purchased by XXXXX are subsequently sold (within 30 days) to
other financial institutions that service the contracts. XXXXX does not perform
any servicing duties and, consequently, does not carry any consumer credit
volume nor collect any payments.

Ordinarily,
making loans or creating or acquiring evidence of debt is not considered
transacting business in most states. In addition, states generally require
nexus in order to be subject to state corporation tax laws. Nexus is usually
defined as requiring both of the following: 1) employees within the state and
2) owning substantial property within the state. XXXXX acquired a Certificate
of Authority within Utah for purpose of establishing a "legal standing"
in case of contract default and enforcement was required. XXXXX has no more
than 2 resident employees and owns no real or personal property in the state of
Utah.

XXXXX's
resident employees are individuals who contact auto dealerships in hopes of interesting
them in placing consumer debt with our company. The employee works from their
home and there is no business office. XXXXX would continue to own no property
in the state of Utah. The individual's contact with the auto dealerships
generally includes explaining our finance program, train the dealers on how to
complete loan documents and explain our loan guidelines. They would perform all
the functions of our current sales staff domiciled in California and would not
have any authority to approve loan contracts; all contracts would continue to
be approved and deemed made in California.

It
is our opinion that all of our income is considered to be generated within the
state of California and should be reported accordingly. As previously
indicated, pursuant to most state statutes, XXXXX is engaged in an activity
which, by definition, does not constitute doing business, i.e. creating as a
lender and acquiring obligations and security interests in personal property
arising out of the financing of retail installment sale contracts. All
contracts are approved in California and are deemed to be created in
California.

We
request a ruling at your earliest opportunity as to whether XXXXX is subject to
Utah corporate income tax. Please provide us with the following information:

1. Is there nexus in the state of
   Utah for purposes of corporate income tax;

2. Is XXXXX required to allocate any
   of its corporate revenues and expenses to the state of Utah;

3. If there are no revenues deemed
   to be generated in the state of Utah, is XXXXX required to file a corporate
   income tax return showing zero activity for your state or are we exempt and
   need not file these forms at all; and

4. For purposes of completing any
   other state forms requiring information regarding financial activity, i.e.
   Annual Reports, etc., are we to report any income or show $0.00. We realize
   that all consumer credit and/or finance sales license reports must show the
   volume of loans purchased.

Thank
you for your assistance in rendering a ruling in this matter. Our aim is to
remain in compliance with all obligatory reporting and licensing requirements.
If you need any additional information regarding our activities in the state of
Utah, l will be happy to provide it to you. Again, thank you for your help in
this matter.

Sincerely,

XXXXX

Compliance
Officer

XXXXX

RE: Application of Utah income tax laws to
XXXXX�s business.

Dear
XXXXX,

We
have received your request for an advisory opinion regarding income tax
issues. We find as follows:

1.
XXXXX (XXXXX) has nexus in Utah for income tax purposes because XXXXX
has two employees working in Utah and because Public Law 86-272 does not
provide an exemption for the types of activities that XXXXX conducts in
Utah. The wages, salaries or
compensation paid to your Utah-based employees must be included in the payroll
factor of the apportionment formula under Utah�s UDITPA provisions. �59-7-315 Utah Code Ann.

2.
Whether XXXXX is required to include any of its gross receipts in the
Utah sales factor depends on where the bulk of the income-producing activity
occurs. Income from sales other than
sales of tangible personal property is included in the sales numerator of the
state that bears the greatest portion of the income-producing activity as
measured by the cost of performance.
�59-12-319 Utah Code Ann.; Utah Admin. R. R865-6F-8. We cannot determine
with certainty from the facts presented in your request whether Utah or California
bears the greatest portion of income-producing activity related to your Utah
contracts. Presumably, the costs of
performance include the costs of purchasing Utah contracts (or paying
commissions to dealers for placing loans with your company) plus the payroll
costs of your sales force in Utah. If
those costs constitute the greatest portion of the total cost of processing and
selling the contracts, gross receipts derived from the Utah contracts must be
attributed to Utah�s sales factor.

3.
As a corporation that is qualified to do business in Utah, XXXXX must
file a corporate franchise tax return which apportions income using the UDIPTA
formula as described above. Utah law
sets the minimum franchise tax at $100.
�59-7-104 Utah Code Ann.; Utah Admin. R. R865-6F-6.

4.
We cannot advise you as to the other state forms or financial
disclosures that may be required by other state agencies because we are not
familiar with their operations or policies.
However, we encourage you to contact the Department of Commerce at the
address and phone number listed below if you further questions.

XXXXX

Please
let us know if you have additional questions.

For the Commission,

Alice Shearer,

Commissioner