Utah ~ Corporate Income Tax: Sales Included in Sales Factor Numerator Adjusted, Wages Included in Payroll Factor Sustained

The amount of sales included in the sales factor numerator of a taxpayer’s apportionment fraction for Utah corporate franchise and income tax purposes had to be adjusted, while the amount of wages determined by the auditing division of the State Tax Commission to be includible in the numerator and the denominator of the taxpayer’s payroll factor was sustained.

Sales Factor

The taxpayer established that certain sales should be removed from the numerator of its sales factor, because the taxpayer was subject to income taxation in other countries for some of the tax years at issue. However, for the tax years for which the taxpayer failed to show that it was subject to income taxation in those other countries, the sales made by the taxpayer in those countries were appropriately included (thrown back) in the taxpayer’s sales factor numerator.

Payroll Factor

All wages of the leased employees who worked at the taxpayer’s facilities in Utah were includible in the numerator and the denominator of the taxpayer’s payroll factor for the years in question. Even though the business that the leased the employees to the taxpayer included those employees for purposes of the payroll taxes imposed by the Federal Insurance Contribution Act, the employees appeared to be common law employees of the taxpayer, whose wages should be included in the taxpayer’s payroll factor, because the taxpayer, not the other business, had control over the work performed by the employees. Also, even if the employees were not common law employees of the taxpayer, their wages were includable in the taxpayer’s payroll factor pursuant to the equitable adjustment provisions of Utah Code Ann. §59-7-320 and Utah Admin. Rule R865-6F-8. These provisions provide for an equitable adjustment if the standard allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s business activity in the state. In addition, the taxpayer did not show that any of the wages at issue were specific to foreign country employees, rather than Utah employees.

Penalties and Interest

Penalties and interest imposed on the basis of the amounts of tax reported on the taxpayer’s initial returns had to be recalculated to reflect the taxpayer’s decreased tax liability, as determined through the appeals process. Although it was previously the State Tax Commission’s policy not to adjust the penalties assessed on an initial return, even if a subsequent return or audit showed that the tax reported on the initial return was incorrect, the current policy in place since 2009 has been to adjust penalties if the underlying tax liability changes from the amount shown on an initial return.

Reasonable cause existed to toll, or waive, any interest that would have otherwise accrued for the period beginning on the date that the parties submitted their post-hearing briefs and ending 30 days after the date of the commission’s decision. The State Tax Commission has, on occasion, tolled interest when there is a significant period between the hearing date and the date of issuance of a decision, pursuant to the authority given in Utah Code Ann. §59-1-401(13) and Utah Admin. Rule R861-1A-42(2). In this case, there was over a two-year period between the hearing date and the date of issuance of a decision.

Commission Decision, Appeal Nos. 05-0594 and 05-1764, Utah State Tax Commission, November 15, 2011, released October 13, 2015, ¶401-115



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