Does an interstate trucking company with no Utah office or employees, and its S-corporation parent, have Utah income or franchise tax nexus just from occasional pickups, deliveries, and pass-through mileage?

Plain-English summary

An out-of-state S-corporation parent ("P," with no employees or Utah property, 16 non-Utah shareholders) wholly owned an interstate contract motor carrier ("T"), organized as a Qualified Subchapter S Subsidiary (QSS) under IRC § 1361(b)(3)(B). T hauled freight exclusively in interstate commerce (no intrastate moves), had no Utah office, dock, or employees, and ran all dispatch/accounting/management out of state. Its Utah footprint was minimal: about 76,000 of its total miles (just 0.13%) were driven in Utah in 1998, roughly 500 pickups/deliveries a year in Utah (under 0.1% of its total stops), no Utah sales staff, and no Utah phone listing. T asked seven questions to determine whether this thin contact created Utah income or franchise tax nexus for T and, separately, for P.

S corporation and QSS status (Questions 1-4). Utah recognizes the Internal Revenue Code as currently enacted, though Utah's own corporate income/franchise tax isn't strictly patterned after federal law. Utah also recognizes both S corporation and QSS status. An S corporation cannot elect to be taxed as a C corporation in Utah -- it's taxed the same way as federally under Subtitle A, Chapter 1, Subchapter S of the IRC, as modified by Utah law (Utah Code Ann. § 59-7-701). A QSS corporation is likewise treated the same way federally treats it under IRC § 1361(b) (Utah Admin. Rule R865-6F-34).

Does T have nexus? (Question 5) Yes. Any foreign corporation qualified to do business in Utah, or actually doing business here, owes Utah corporate franchise tax; a nonqualified foreign corporation instead owes Utah income tax if it derives income from revenue-producing property located in or moving through Utah -- explicitly including a freight/transportation operation. Utah Admin. Rule R865-6F-19(H) specifically governs trucking company apportionment, requiring a carrier to apportion income to Utah if it meets any one of four tests during the tax year: (a) owns/rents/leases property in Utah; (b) makes Utah pickups or deliveries; (c) travels more than 25,000 miles in Utah and that exceeds 3% of its total mileage; or (d) makes 12 or more trips into Utah. T failed test (c) outright (0.13% of total mileage, far under the 3% floor), but the Commission found it met (a) and (b) -- it operates leased/owned property in Utah to make pickups and deliveries -- and likely (d) as well, given its roughly 500 annual Utah stops. Meeting even one of the four tests is enough, so T has nexus.

Does the owner-operators' location matter? (Question 6) No. T has Utah nexus regardless of whether its independent owner-operators' businesses happen to be based in Utah.

Does P have nexus? (Question 7) Yes. T's Utah nexus creates nexus for P too.

What this means for you

Interstate trucking, logistics, and freight companies with minimal state contact

A very small share of total mileage (here, 0.13%) does not protect you from nexus if you separately meet any of the other trucking-apportionment tests -- routine pickups and deliveries alone were enough here, even without any Utah office, employees, or significant mileage. Review all four tests in Rule R865-6F-19(H) independently; failing one doesn't help you if you meet another.

S-corporation parents with a Qualified Subchapter S Subsidiary

Unlike an ordinary parent-subsidiary relationship (where a subsidiary's nexus doesn't automatically attach to an unrelated parent absent evidence of domination or control), a QSS arrangement is different: because the QSS election treats the subsidiary as part of the parent for federal (and, by Rule R865-6F-34, Utah) tax purposes, the subsidiary's nexus flows straight up to the parent. If your subsidiary structure uses a QSS election, expect its nexus to become the parent's nexus as a matter of course.

Accountants and tax professionals

This ruling is a clean checklist application of Rule R865-6F-19(H)'s four independent trucking-nexus triggers, and a useful contrast case for QSS nexus attribution versus the fact-dependent domination/control test that applies to ordinary corporate subsidiaries elsewhere in Utah nexus law.

Common questions

Q: Does an interstate trucker need significant Utah mileage to have nexus?
A: No. Nexus can arise from any one of several independent tests -- owning/leasing Utah property, making Utah pickups/deliveries, exceeding a mileage threshold, or making 12+ Utah trips a year. Even minimal mileage doesn't help if another test is met.

Q: Does it matter where a trucking company's independent owner-operators are based?
A: No, according to this ruling -- nexus exists regardless of the owner-operators' home locations.

Q: If a subsidiary has Utah nexus, does its parent automatically have nexus too?
A: It depends on the corporate structure. Here, because the subsidiary was a Qualified Subchapter S Subsidiary (treated as part of the parent for tax purposes), its nexus flowed directly to the parent -- a different result than an ordinary separately-taxed subsidiary might produce.

Q: Does this ruling apply to my trucking or logistics company?
A: No. It binds the Commission only for the requesting companies and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes and rules:

• § 59-7-701 (S corporation taxed same as federal, as modified by Utah law)
• Utah Admin. Rule R865-6F-34 (QSS treated same as federal under IRC § 1361(b))
• § 59-7-101(10); Utah Admin. Rule R865-6F-1(A), R865-6F-6(B), (G) (franchise/income tax nexus for foreign corporations)
• Utah Admin. Rule R865-6F-19(H) (trucking company apportionment tests)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/99-050.htm

Original ruling text

99-050

Response April 26,
2000

REQUEST LETTER

October 22, 1999

Re: Income and Franchise Tax Liability and Responsibility

I represent a STATE corporation, based in STATE and its subsidiaries. The corporation has numerous subsidiaries whose principal activities involve transportation services. These services include; transportation (primarily trucking) of freight in interstate commerce; unloading and reloading freight for consolidation into full railcar or truckload outbound shipments: loading and unloading of vehicles for railroads; and providing logistics services to industry among other things.

My clients (the parent and its' subsidiaries) are aware of different interpretations of Asubstantial nexus" for motor carriers for the purpose of imposing income and or franchise tax obligations. They wish to determine Utah position concerning their income and franchise tax obligations. In order to determine this position, they want to present the fact pattern described below to the state and wish to have the state give them answers to the questions they pose which follow the description of facts

FACTS

Company P is a STATE corporation and is the parent company of several subsidiaries. It owns 100% of Company T's stock. Company P is an S Corporation and it has no employees. It owns no property in Utah but it does own property in its own corporate name in other states. P has 16 shareholders. None of these shareholders are residents of Utah and none of them own any property in Utah. All of Company P's subsidiaries (including Company T) are Qualified S Subsidiaries as that term is defined in the Internal Revenue Code (created by the enactment of new code section 1361(b)(3)(B) in August, 1996 and effective beginning 1-1-97). The subsidiary companies have all filed Form 966 - Corporate Dissolution or Liquidation with the IRS as suggested by the Department of Treasury in Notice 97-4. Their election to be treated as a qualified S Subsidiary is revocable. All the corporations, parent and subsidiaries, continue to exist under state law. The liquidation described above is for Federal income tax purposes only. It has no impact on any of the corporation=s legal existence under state laws.

Company T is an Illinois corporation whose business is that of a contract motor carrier. T is a Qualified S Subsidiary whose parent is Company P. T has interstate authority to transport freight for other companies on a contract basis. It is precluded under ICC authority from operating anything but interstate movements. There are no intrastate movements (those originating and concluding in the same state). T does not have a freight consolidation dock, nor is any other business property located in your state. Further, T does not employ any personnel in your state; all dispatching, accounting and managerial functions are conducted in other states.

T is registered for Highway Fuel Use Tax and reports liability based on miles driven in your state by independent owner/operators of tractors. During 1998, records show that a total of 76,000 miles were traveled in Utah. This is .13 percent (.13%) of the total miles traveled in all states. The company has agreements with approximately 500 independent owner/operators. At this time none of the owner operators businesses are located in Utah, however, T has had agreements with independent owner operators whose businesses were located in Utah in the past. T enters into

agreements with owner operators in a form like the one enclosed with this letter. T does NOT execute agreements in Utah. It is likely that some of the 500 owner/operators stop in the state

for overnight rests as required by the Department of Transportation. In the future, some independent owner/operators from Utah may have their business based in Utah. If located in Utah they may drive their tractors to their home at night or over the weekend. T also makes pickups and deliveries in Utah as part of an interstate movement of freight. T makes approximately 500 such stops each year in Utah. This is less than 1/10th of 1% of the total number of pickups or deliveries made by the company. T's trucks primarily pass through the state.

T has no sales staff located in your state. T's out-of state sales staff has no knowledge of entering your state for the purpose of soliciting business. T uses some brochures in its sales function and these may find their way into your state through mailings. T is not listed in a local telephone directory in Utah.

QUESTIONS

As stated above, my client's objective in disclosing this information is to ascertain whether the contact with the state described above would subject either of the companies to income or franchise tax. Based on this objective we would ask for answers to the questions listed below.

1. Does Utah recognize the Internal Revenue Code as currently enacted by the Federal Government?

2. Does Utah recognize S Corporation and QSS Corporation status?

3. Does Utah law require an S Corporation to elect to be taxed as an S Corporation or can an S Corporation be taxed as a C Corporation is taxed?

4. Does Utah law require a QSS Corporation to elect to be taxed as an S Corporation or can a QSS Corporation be taxed as a C Corporation is taxed?

5. Based on the facts stated above, does T Corporation have nexus for income and franchise tax purposes in Utah?

6. Would the answer to question 5 change if T Corporation had agreements with independent owner operators whose businesses were located in Utah?

7. Based on the facts stated above, does P Corporation have nexus for income and franchise tax purposes in Utah?

Please send your response to my office at the address shown above. Should you need additional information, please contact my office and we will provide that information to you. If you feel that there is additional information or explanation of your laws and regulations that would be helpful to my client in their situation, please send us that information or give us guidance on how to access the information.

Sincerely

NAME

RESPONSE LETTER

April 26, 2000

NAME

ADDRESS

RE: Advisory Opinion - Taxation of trucking company

Dear NAME,

We have received your request for information pertaining to the taxation of an interstate trucking company that operates in Utah. We offer the following tax guidance in response to your questions:

1. Utah recognizes the Internal Revenue Code as currently enacted, but Utah Corporate Income and Franchise tax law is not strictly patterned after the federal law.

2. Utah recognizes S Corporation and QSS Corporation status.

3. Under Utah law, an S Corporation cannot be taxed as a C corporation, but is taxed in the same manner as it is taxed for federal purposes as provided in Subtitle A, Chapter 1S of the Internal Revenue Code, as modified by Utah law. Utah Code Ann. '59-7-701.

4. Under Utah law, a QSS Corporation is treated in the same manner as it is treated for federal tax purposes under Section 1361 (b) of the Internal Revenue Code. Utah Administrative Rule R865 -6F-34 (copy enclosed).

5. Any foreign corporation qualified to do business under the laws of Utah or doing business in Utah is subject to Utah corporation franchise tax. Utah Code Ann. '59-7-101 (10), Utah Admin. Rule R865-6F-1 (A) and Utah Admin. Rule R865-6F-6 (B). Any nonqualified foreign corporation is subject to Utah income tax if it derives income from revenue-producing properties located in Utah or moving through Utah, such as a freight or transportation operation. Utah Admin. Rule R865-6F-6 (G).

Utah Administrative Rule R865-6F-19 (H) (copy enclosed) specifically addresses the taxation of trucking companies. Under that rule, T must apportion income to this state if, during the tax year it meets any of the following criteria:

a. Owns, rents or leases real or personal property in this state;

b. Makes pick ups or deliveries in this state;

c. Travels more than 25,000 mobile miles in Utah, provided that the mileage in Utah exceeds 3% of the total mileage traveled in all states; or

d. Make 12 or more trips into Utah.

T meets two, and perhaps three, of the conditions stated. It owns or leases property that it operates in Utah (Aa@) to make pick ups and deliveries (Ab@). Although not specifically mentioned in the facts, T presumably makes 12 or more trips into Utah during the tax year (Ad@). It appears that T does not meet Ac@ because its mileage in Utah amounts to only .13% of its total mileage. Therefore, the condition set out in Ac@ is not met. However, as stated above, it is not necessary for T to meet all four standards.

6. T has nexus in Utah whether or not T=s independent operators have businesses in Utah.

7. T=s nexus in Utah creates nexus for P.

I am enclosing a copy of Utah Administrative Rule R865-6F-19, Taxation of Trucking Companies, to provide additional information that may be of interest to you. If you have any additional questions, please let us know.

For the Commission,

Marc B. Johnson

Commissioner

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