What Utah corporate taxes does an out-of-state mortgage lender owe if it's qualified to do business in Utah but has no offices, property, or employees here?

Plain-English summary

A law firm asked the Utah State Tax Commission, on behalf of a non-depository residential first-mortgage lender doing business in Utah and 14 other states, what Utah taxes the company might owe. The company's Utah footprint was minimal: it holds a Certificate of Authority to do business as a foreign corporation and (where required) a mortgage lending license, contracts on a case-by-case basis with local title companies and appraisers for closings, advertises via television, communicates with customers only by phone and mail, has no offices, property, or employees in Utah, and sells each closed mortgage loan immediately to an institutional investor.

The Commission's answer, in three parts:

1. Nexus. Every corporation doing business in Utah, or merely qualified to do business in Utah, is subject to Utah's corporate franchise tax — even one engaged solely in interstate commerce. Because the company holds a Certificate of Authority and is qualified to do business in Utah, it has nexus for income tax purposes on that basis alone, and Public Law 86-272's protections (which shield certain out-of-state solicitation activity from state income tax) don't help here, since the company is registered/qualified rather than relying on the interstate-solicitation-only exception.

2. Tax rate and apportionment. The tax is 5% of income apportioned to Utah, or a $100 minimum, whichever is greater. Utah uses the standard three-factor UDITPA apportionment formula — property factor, payroll factor, and sales factor, each expressed as a Utah/everywhere fraction and then averaged (added together and divided by three) — multiplied by total apportionable income:

• Property factor: zero, since the company owns/leases no real or personal property in Utah.
• Payroll factor: zero, since the company has no Utah employees (compensation to independent contractors doesn't count toward this factor either way).
• Sales factor: not zero. Income from Utah loan transactions, or loan-account sales in Utah, counts toward Utah's sales factor. Where income-producing activity happens partly in Utah and partly elsewhere, it's attributed to Utah if the greater proportion of the activity — measured by cost of performance (direct costs like commissions/fees paid to a Utah title company) — occurs in Utah. Costs for personal services are attributed to Utah to the extent the services are actually performed here.

Non-business income is separately allocated under Utah's UDITPA provisions (§§ 59-7-306 through 59-7-310).

3. Bottom line. Because the property and payroll factors are both zero but the sales factor is not, the company still owes some Utah franchise tax (5% of its apportioned income, or the $100 minimum, whichever is greater) — physical absence from the state doesn't eliminate tax liability once nexus is established through qualification to do business here.

What this means for you

Out-of-state mortgage lenders and similar finance companies qualified to do business in Utah

Simply holding a Certificate of Authority to do business in Utah as a foreign corporation is enough, by itself, to create Utah corporate franchise tax nexus — you don't need offices, employees, or property in the state. Once you're registered/qualified here, Public Law 86-272's solicitation-only protection isn't the relevant shield.

Businesses with zero property and zero payroll in Utah

Don't assume zero property and zero payroll factors mean zero Utah tax. If your sales factor picks up any Utah-sourced income (here, income from Utah loan transactions/loan-account sales, measured by cost of performance), you'll still owe the $100 minimum franchise tax at least, and potentially more depending on your apportioned income.

Accountants apportioning income for lenders with local vendor relationships (title companies, appraisers, brokers)

The "cost of performance" test looks at direct costs like commissions and fees paid to in-state vendors (e.g., a Utah title company) and where personal services are actually performed — track these carefully for multi-state lenders to correctly source sales-factor income.

Common questions

Q: We're qualified to do business in Utah as a foreign corporation but have no offices or employees there — do we owe Utah tax?
A: Yes, according to this ruling — being qualified/registered to do business in Utah creates nexus on its own, and you'll owe at least the $100 minimum corporate franchise tax, more if your apportioned Utah income (via the sales factor) is significant.

Q: Does Public Law 86-272 protect us since our only Utah contact is originating loans by phone/mail?
A: Not according to this ruling — P.L. 86-272 wasn't found relevant here because the company was already qualified/registered to do business in Utah, which independently creates nexus regardless of the solicitation-only protections P.L. 86-272 offers to unregistered out-of-state sellers.

Q: If we have no Utah property or payroll, is our apportioned Utah income automatically zero?
A: No. The sales factor operates independently — Utah-sourced sales/loan income (measured by cost of performance) can still create a positive apportionment percentage even when the property and payroll factors are both zero.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-7-306 through § 59-7-310 (UDITPA allocation of non-business income)
• Utah Admin. Rule R865-6F-6 (foreign corporation nexus)
• 15 U.S.C. §§ 381-384 (Public Law 86-272)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/96-177.htm

Original ruling text

96-177

Response
January 6, 1997

Request

XXXXX

Utah
State Tax Commission

210
North 1950 West

Salt
Lake City, Utah 84134

RE: Company A: Request for Letter Ruling on Applicable
Corporate Tax; Nexus

Dear
XXXXX,

This firm represent XXXXX, A XXXXX
corporation which is engaged in first mortgage lending in fifteen state,
including Utah. The purpose of this
letter is to request a Letter Ruling addressing which corporate and/or other
Utah taxes, if any, our client may be liable for. I have sent several letters to XXXXX, in the Internal Research
Department, and have received two letters responding to the issue of nexus and
taxation of foreign corporations, but have not received any guidance as to our
client�s particular situation.

I have received and reviewed a copy
of Utah administrative rule R865-6F-6.
I have also reviewed 15 U.S.C. 381-384 which is mentioned under the
administrative rule. After reviewing
the statutes, administrative rule, and correspondence from the State Tax
Commission, I am still uncertain as to which taxes, if any our client may be
liable for. Any help that you may
provide will be greatly appreciated.

The following facts apply to your
state, and to every state in which COMPANY conducts mortgage lending. COMPANY
is a non-depository, residential first mortgage lender and, at some time in the
future, may become a mortgage servicer. The Corporation first obtains a Certificate of Authority to
conduct business as a foreign corporation.
Second,COMPANY then applies for a mortgage lending license, if necessary.
COMPANY contracts with local title companies and appraisers, on a case-by-case
basis, in the various communities where each mortgage customer lives. Closings are held at the locale title
company offices. In some states
COMPANY, Incorporated contracts with, and buys loans from independent licensed
loan brokers. In addition, in some
states COMPANY has one or more employees to solicit loans from independent
licensed loan brokers. COMPANY does not have any employees in Utah. After closing a mortgage loan, the
Corporation immediately sells it to an institutional investor.

With respect to the issue of
nexus,COMPANY, Incorporated operates its business entirely in STATE and does
not have any offices, assets, employees, or any physical presence in any other
state, with the exception of those state where the Corporation has employees to
solicit loans from brokers. In those
states where the Corporation has employees to solicit loans from brokers, the
employees operate out of their homes and their business cards and stationary
have the Corporation�s address and
telephone number listed on them. The
Corporation itself does not have any offices, telephone numbers, etc. outside
of STATE. The Corporation advertises is
lending services in the various state through television advertising, and all
communication with customers is done entirely by telephone and mail.

Please provide our firm with an
opinion letter outlining which corporate and/or other state taxes, if any, our
client may be liable for. Please also
indicate which tax returns, if any must be filed in your state, and the respective
deadlines for filing. I encourage you
to contact me at my office is you have any questions concerning this matter.

Thank you in advance for your
courtesy and cooperation.

Very
Truly yours,

XXXXX

NAME

ADDRESS

CITY,
STATE, ZIP

Advisory
Opinion - Corporate Income Tax

Dear
XXXXX,

We have received your request for an
opinion as to the Utah tax liability of your client, COMPANY. We offer the following tax guidance:

1. Nexus -COMPANY is subject to Utah corporate tax
provisions if it has nexus in Utah.

Every corporation doing business in
Utah or qualified to do business in Utah is subject to Utah corporate franchise
tax. A foreign corporation that is
qualified in Utah is subject to the tax even though engaged solely in
interstate commerce.

Although a company that registers
here or is otherwise qualified to do business here is entitled to certain
protections under Public Law 86-272, those provisions are not relevant here. COMPANY
is qualified to do business in Utah and it has nexus for income tax
purposes. Therefore, COMPANY must file under Utah�s corporate tax
provisions.

2. Apportionment of Income - The tax imposed on COMPANY is
5% of its income apportioned to Utah or a minimum of $100.

A portion of COMPANY�S income must be apportioned to Utah under
Utah�s UDITPA provisions. The amount of
income apportioned to Utah is determined by multiplying COMPANY total income by a fraction, the numerator of
which is the property factor, plus the payroll factor, plus the sales factor,
and the denominator of which is three.
The three factors are explained below.

Any non-business income is allocated
under the UDITPA provisions (see attached copies of Utah Code sections 59-7-306
through 59-7-310).

A. The Property Factor.
The property factor is a fraction which is calculated on the basis of
the average value of the company�s real and personal property in this state
during the tax period compared to the average value of all of the company�s
real and personal property. You
indicate that COMPANY does not own or lease property in Utah. Therefore, the property factor is zero.

B. The Payroll Factor.
The payroll factor is a fraction, the numerator of which includes the
total compensation paid by COMPANY in Utah during the tax period and the
denominator of which includes the total compensation paid by COMPANY everywhere
during the tax period. Compensation
includes wages, salaries, commissions or other forms of remuneration paid to
employees for personal services.
�Employee� means an officer of the corporation, or any person who is included by COMPANY as an employee
for purposes of payroll taxes. Payments
made to an independent contractor or other person who is not classified as an
employee are excluded from the payroll factor.

You indicate that COMPANY has no
employees in Utah. If that is so,
COMPANY�s Utah payroll factor is zero.

C. The Sales Factor. The
sales factor is a fraction, the numerator of which is the total income from
Utah sales during the tax period, and the denominator of which is the total of
all sales for the tax period. Income
from COMPANY�s activities must be included in the Utah sales factor if the
income-producing activity takes place solely in Utah. If an income-producing activity is performed both in Utah and
elsewhere, the income from that activity is attributable to Utah if the greater
proportion of the income-producing activity takes place here, as measured by
cost of performance.

�Income� means business income
arising from transactions and activities in the regular course of COMPANY�s
business and includes income from sales or property or services, interest,
compensation, or other gross receipts arising from Utah loan accounts or sales
in Utah of loan accounts. �Cost of
performance� refers to direct costs of COMPANY�s income-producing activity
(such as commissions or fees paid to a Utah title company) determined in a
manner consistent with generally accepted accounting principles. Costs for personal services are attributable
to Utah to the extent that the services are performed in Utah.

From the facts presented in your
request, we assume that COMPANY has income which must be attributed to the Utah
sales factor. The formula for
determining the amount of income apportioned to Utah is as follows:

Utah Income = Property
Factor + Payroll Factor + Sales Factor X Total Apportionable
Income

3

As stated above, the amount of tax
due is 5% of the Utah income or a minimum of $100.

For
the Commission,

XXXXX,

Commissioner