No. 40969 (5-year Review): Rule R865-6F. Franchise Tax

DAR File No.: 40969
Filed: 11/10/2016 09:39:06 AM

NOTICE OF REVIEW AND STATEMENT OF CONTINUATION

Concise explanation of the particular statutory provisions under which the rule is enacted and how these provisions authorize or require the rule:

Sections 16-10a-1501 through 16-10a-1533 establish guidelines by which a business may receive authority to become qualified or incorporated to transact business in Utah, and the penalties for transacting business without authority. Requirements for establishing a legal place of business for foreign corporations operating in the state are addressed, as well as requirements for the withdrawal of a foreign corporation. These sections provide guidelines for revocation. Also outlines procedures for a foreign company to become domesticated. Section 53B-8a-112 gives the Tax Commission permission to establish rules to implement the corporate franchise and individual income tax imposed on the Utah Educational Savings Plan Trust property and income. Sections 59-1-1301 through 59-1-1309 create the Reportable Transactions Act which include defining "material advisor" and "reportable transaction," requiring the disclosure of reportable transactions and lists maintained by a material advisor, and providing penalties. Section 59-6-102 requires that each producer of minerals in Utah deduct an amount equal to 5% of the amount that would be paid to the person entitled to the payment. Any person filing an income tax return is entitled to a credit against this tax if the amount withheld is greater than the tax due on the return. Section 59-7-101 defines terms used in the corporate tax code. Section 59-7-102 provides exemptions from the corporate tax. Section 59-7-104 requires all foreign and domestic corporations to pay an annual corporate franchise or income tax. Section 59-7-105 provides additions to unadjusted income for computing adjusted income. Section 59-7-106 provides subtractions from unadjusted income for computing adjusted income. Section 59-7-108 provides guidelines on the treatment of distributions made by corporations. Section 59-7-112 provides for the governance of installment sales. Sections 59-7-302 through 59-7-321 require allocation and apportionment of income for corporations earning income both within and without the state. These sections also establish a three-part formula for apportionment of business income based on the property factor, payroll factor, and sales factor, as well as a double-weighted sales factor formula, and single sales factor formula for the apportionment of business income. Section 59-7-317 provides instructions for computing sales factor with regard to corporate franchise tax. Section 59-7-321 provides that the purpose of Title 59, Chapter 7, Part 3, is to make uniform the law of those states that enact its provisions. Section 59-7-402 indicates when corporations must file a water's edge combined report and gives direction on who may elect to file the report. Section 59-7-403 provides unitary groups with the option of filing a worldwide combined report; if this report is elected, they must continue to file this report unless they have consent from the Tax Commission to file on another basis. Section 59-7-501 provides guidelines for taxable period and accounting method to be used in computing Utah taxable income. Section 59-7-502 states that if a corporation changes its taxable year for federal tax purposes or changes its accounting period, the new taxable year or accounting period shall become the corporation�s taxable year for Utah corporate franchise and income tax. Section 59-7-505 establishes requirements for filing returns, including combined returns, and states when they are due. Section 59-7-609 provides a corporate franchise tax credit equal to 20% of the qualified rehabilitation expenditures made in connection with the restoration of a residential certified historic building. Section 59-7-614 provides a corporate franchise tax credit for renewable energy systems. Section 59-13-202 creates a corporate franchise tax credit against fuel tax for persons using stationary farm engines, and self-propelled nonhighway farm machinery. Section 59-13-301 imposes a special fuels tax on special fuels; provides for transactions exempt from the tax; and requires exemptions to be taken in the form of a tax refund. Sections 63N-2-201 through 63N-2-215 establishes the Enterprise Zone Act, which provides state assistance to businesses operating in rural parts of the state and provides state tax credits for certain businesses operating within the enterprise zone.

Summary of written comments received during and since the last five-year review of the rule from interested persons supporting or opposing the rule:

No written comments have been received.

Reasoned justification for continuation of the rule, including reasons why the agency disagrees with comments in opposition to the rule, if any:

Section R865-6F-1 clarifies franchise tax responsibilities of foreign corporations, and also, clarifies the manner in which a foreign corporation terminates its corporate franchise tax responsibilities. Section R865-6F-2 establishes taxable year for purposes of the corporate franchise tax and clarifies when first return period begins. Section R865-6F-6 sets forth guidelines to determine whether nexus has been established for purposes of subjecting a corporation to the Utah corporation franchise tax. Section R865-6F-8 classifies all business income as either "business" or "nonbusiness," provides rules to determine whether income is business or nonbusiness, defines and establishes criteria for apportionment of tax, and defines the three elements of the apportionment formula: the property factor, payroll factor, and sales factor. Section R865-6F-14 states the tax commission policy to follow federal law as closely as possible in determining net income for Utah corporate franchise tax. The section lists items normally followed in conformity with federal law and items requiring different state tax treatment. Section R865-6F-15 clarifies that the installment method of reporting corporate income is a postponement of tax, not an exemption from tax. The section states when the privilege of installment reporting is terminated. The section also states that installment income is subject to the same allocation and apportionment provisions as all other corporate income. Section R865-6F-16 provides a methodology for apportioning income from long-term construction projects when a taxpayer elects to use the percentage-of-completion method of accounting or the completed contract method of accounting. Section R865-6F-18 defines "member" and "producer" for purposes of the corporate franchise and income tax exemption for a farmers' cooperative; provides procedures for qualifying for and applying the exemption. Section R865-6F-19 provides a methodology for apportioning trucking company income to Utah. Section R865-6F-22 defines "worldwide year" and "water's edge year" in treatment of carrybacks and carry forwards and notes criteria and penalties for switching from worldwide method to water's edge or from water's edge method to worldwide method. Section R865-6F-24 provides that, in the case of a unitary group, nexus created by any member of the group creates nexus for the entire unitary group. Section R865-6F-26 provides instructions for applying for and receiving historic preservation tax credit and any subsequent carryforwards of that credit. Section R865-6F-27 provides that the order of deducting credits against the corporate franchise tax is: 1) nonrefundable credits; 2) nonrefundable credits with a carryforward; and 3) refundable credits. Section R865-6F-28 provides guidance on what investments qualify for the enterprise zone franchise tax credits and how a business should calculate its base number of employees. The section also outlines the effect on tax credits if a county loses its designation as an enterprise zone. Section R865-6F-29 provides a methodology for apportioning railroad income to Utah. Section R865-6F-30 sets forth the information a trustee of the Utah Educational Savings Plan Trust must provide to the Tax Commission and the forms necessary to provide this information to the Tax Commission. Section R865-6F-31 defines "outer-jurisdictional property," "print," "printed materials," "purchaser," "subscriber," and "terrestrial facility"; and provides a methodology for apportioning income of publishing companies to the state for franchise tax purposes. Section R865-6F-32 provides a methodology for apportioning the income of financial institutions to the state for franchise tax purposes; and defines terms related to financial institutions. Section R865-6F-33 defines terms related to telecommunications corporations; and provides a methodology for apportioning and allocating income for telecommunications corporations to the state for purposes of franchise tax. Section R865-6F-36 defines terms for registered securities or commodities brokers or dealers; and provides a methodology for apportioning the income of registered securities or commodities brokers or dealers to the state for corporate franchise and income tax purposes. Section R865-6F-37 indicates how a taxpayer shall disclose a reportable transaction to the Tax Commission and how a material advisor shall disclose a reportable transaction to the Tax Commission. Section R865-6F-38 provides that, in the absence of fraud, the amount certified as qualifying for the renewable energy systems tax credit shall be the amount allowed by the Tax Commission as a credit. Section R865-6F-39 defines captive real estate investment trust for purposes of the addition to unadjusted income required to compute the taxable income of a captive real estate investment trust. Section R865-6F40 indicates that the activities of a partnership are taken into consideration in determining whether a corporation qualifies as a foreign operating company. Therefore, this rule should be continued.

The full text of this rule may be inspected, during regular business hours, at the Office of Administrative Rules, or at:

Tax Commission
Auditing
210 N 1950 W
SALT LAKE CITY, UT 84134

Direct questions regarding this rule to:

• Christa Johnson at the above address, by phone at 801-297-3901, by FAX at 801-297-3907, or by Internet E-mail at [e-mail]

Effective:

11/10/2016

Authorized by:

Rebecca Rockwell, Commissioner

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