No. 29624: R865-6F. Franchise Tax

DAR File No.: 29624
Filed: 03/08/2007, 11:29
Received by: NL

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. They also provide guidelines for revocation. Also, these sections outline 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. 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. They also establish a three-part formula for apportionment of business income based on the property factor, payroll factor, and sales factor. Section 59-7-317 provides instructions for computing sales factor with regard to corporate franchise tax. 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 59-7-601 creates a corporate franchise tax credit for certain gross interest income. Section 59-7-602 creates a corporate franchise tax credit for corporations making cash contributions to sheltered workshops. Section 59-7-603 creates a corporate franchise tax credit for corporations donating sophisticated technological equipment to schools. Section 59-7-605 creates a corporate franchise tax credit for corporations purchasing new vehicles powered by clean burning fuels or converting vehicles to clean burning fuels. Section 59-7-606 creates a corporate franchise tax credit for corporations that convert stoves to utilize cleaner burning fuels. Section 59-7-607 creates a corporate franchise tax credit for corporations receiving an allocation of the annual federal low-income housing tax credit. Section 59-7-608 provides a corporate franchise tax credit for corporations that hire certain individuals with a disability. 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 59-7-610 provides a corporate franchise tax credit for businesses operating in a recycling market development zone. Section 59-7-612 provides a corporate franchise tax credit for research activities conducted in the state. Section 59-7-613 provides a corporate franchise tax credit for machinery, equipment, or both used in conducting qualified research or basic research in the state. Section 59-7-614 provides a corporate franchise tax credit for renewable energy systems. Section 59-7-701 allows an S corporation to be taxed for state purposes the same as it is taxed for federal purposes. Section 59-7-703 requires an S corporation to pay or withhold tax for nonresident shareholders and indicates how that tax shall be calculated. 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. Sections 63-38f-401 through 63-38f-415 establish the enterprise zone act, which provides state assistance to businesses operating in rural parts of the state. Section 63-38f-413 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. It 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 rule 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. This section states when the privilege of installment reporting is terminated. This 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-23 defines "permitted mine" and "purchaser outside of the United States" in regard to the Utah steam coal tax credit. This section also establishes criteria necessary to qualify and use steam coal tax credit in the state of Utah. 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 carry forwards 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 carry forward; 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. This 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 commission. Section R865-6F-31 defines "outer-jurisdictional property," "print," "printed materials," "purchaser," "subscriber," and "terrestrial facility." This section also 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; provides a methodology for apportioning and allocating income for telecommunications corporations to the state for purposes of franchise tax. Section R865-6F-34 defines "qualified subchapter S subsidiary"; provides that an entity that meets the federal definition of a qualified subchapter S subsidiary will be treated for state corporate franchise tax purposes in the same manner it is treated for federal income tax purposes; indicates how the S corporation parent of a qualified subchapter S subsidiary determines nexus and how the S corporation parent calculates the payroll, property, and sales tax factors for purposes of apportioning income to the state. Section R865-6F-35 clarifies calculation of tax S corporations are required to pay or withhold for nonresident shareholders; indicates information the S corporation must provide for the Tax Commission for each nonresident shareholder. 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. Therefore, this rule should be continued.

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

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

Direct questions regarding this rule to:

Cheryl Lee at the above address, by phone at 801-297-3900, by FAX at 801-297-3919, or by Internet E-mail at [e-mail]

Authorized by:

D'Arcy Dixon, Commissioner