1 CCR 201-3
DEPARTMENT OF REVENUE Taxpayer Service Division - Tax Group ALLOCATION AND APPORTIONMENT FOR CORPORATE INCOME TAX UNDER MULTI-STATE TAX COMPACT 1 CCR 201-3 [Editor’s Notes follow the text of the rules at the end of this CCR Document.] Reg. IV.1.(a). Business and Nonbusiness Income Defined.
(1) Article IV. 1. (a) defines “business income” as income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. In essence, all income which arises from the conduct of trade or business operations of a taxpayer is business income. For purposes of administration of Article IV, the income of the taxpayer is business income unless clearly classifiable as nonbusiness income.
(2) Nonbusiness income means all income other than business income.
(3) The classification of income by the labels occasionally used, such as manufacturing income, compensation for services, sales income, interest, dividends, rents, royalties, gains, operating income, nonoperating income, etc., is of no aid in determining whether income is business or nonbusiness income. Income of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of a trade or business. Accordingly, the critical element in determining whether income is “business income” or “nonbusiness income” is the identification of the transactions and activity which are the elements of a particular trade or business. In general all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business. (See Regulation IV.
1. (b) for further explanation of what constitutes a trade or business.) Reg. IV.1.(b).
(1) Two or More Businesses of a Single Taxpayer. A taxpayer may have more than one “trade or business.” In such cases, it is necessary to determine the business income attributable to each separate trade or business. The income of each business is then apportioned by an apportionment formula which takes into consideration the instate and outstate factors which relate to the trade or business the income of which is being apportioned.
(2) Single trade or business. The determination of whether the activities of the taxpayer constitute a single trade or business or more than one trade or business will turn on the facts in each case. In general, the activities of the taxpayer will be considered a single business if there is evidence to indicate that the segments under consideration are integrated with, dependent upon or contribute to each other and the operations of the taxpayer as a whole. The following factors are considered to be good indicia of a single trade or business, and the presence of any of these factors creates a strong presumption that the activities of the taxpayer constitute a single trade or business:
(A) Same type of business. A taxpayer is generally engaged in a single trade or business when all of its activities are in the same general line.
(B) Steps in a vertical process. A taxpayer is almost always engaged in a single trade or business when its various divisions or segments are engaged in different steps in a large, vertically structured enterprise.
(C) Strong centralized management. A taxpayer which might otherwise be considered as engaged in more than one trade or business in properly management, coupled with the existence of centralized departments for such functions as financing, advertising, research, or purchasing.
Reg. IV.1.(c). Business and Nonbusiness Income: Application of Definitions (1).
(1) The following are rules for determining whether particular income is business or nonbusiness income.
(2) Rents from real and tangible personal property. Rental income from real and tangible property is business income if the property with respect to which the rental income was received is used in the taxpayer's trade or business or incidental thereto and therefore is includable in the property factor under Regulation IV.10.
(3) Gains or losses from sales of assets. Gain or loss from the sale, exchange or other disposition of real or tangible or intangible personal property constitutes business income if the property while owned by the taxpayer was used in the taxpayer's trade or business. However, if such property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange or other disposition, the gain or loss will constitute nonbusiness income. (See Regulation IV. 10.)
(4) Interest. Interest income is business income where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to such trade or business operations.
(5) Dividends. Dividends are business income where the stock with respect to which the dividends are received arises out of or was acquired in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the stock is related to or incidental to such trade or business operations.
(6) Patent and copyright royalties. Patent and copyright royalties are business income where the patent or copyright with respect to which the royalties were received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the patent or copyright is related to or incidental to such trade or business operations.
Reg. IV.1.(d). Proration of Deductions (1) In most cases an allowable deduction of a taxpayer will be applicable only to the business income arising from a particular trade or business or to a particular item of nonbusiness income. In some cases an allowable deduction may be applicable to the business incomes of more than one trade or business and/or to several items of nonbusiness income. In such cases the deduction shall be prorated among such trades or businesses and such items of nonbusiness income in a manner which fairly distributes the deduction among the classes of income to which it is applicable.
(2) Consistency and uniformity in reporting.
(A) Year-to-Year consistency. In filing returns with this state, if the taxpayer departs from or modifies the manner of prorating any such deduction used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modifications.
(B) State-to-State uniformity. If the returns or reports filed by a taxpayer with all states to which the taxpayer reports under Article IV of this Compact or the Uniofrm Division of Income for Tax Purposes Art are not uniform in the application or proration of any deduction, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
Reg. IV.2.(a). Definitions.
(1) “Taxpayer” means any corporation, partnership, firm, association, governmental unit or agency or person, acting as a business entity in more than one state.
(2) “Apportionment” refers to the division of business income between states by the use of a formula containing apportionment factors.
(3) “Allocation refers to the assignment of nonbusiness income to a particular state.
(4) “Business activity” refers to the transactions and activity occurring in the regular course of a particular trade or business of a taxpayer.
Reg. IV.2.(b)(1). Application of Article IV: Appointment. If the business activity in respect to any trade or business of a taxpayer occurs both within and without this state, and if by reason of such business activity the taxpayer is taxable in another state, the portion of the net income (or net loss) arising from such trade or business which is derived from sources within this state shall be determined by apportionment in accordance with Article IV.9 through IV.17.
Reg. IV.2.(b)(2). Application of Article IV: Combined Report. If a particular trade or business is carried on by a taxpayer and one or more affiliated corporations, nothing in Article IV or in these regulations shall preclude the use of a “combined report” whereby the entire business income of such trade or business is apportioned in accordance with Article IV.9IV.9 through IV.17.
Reg. IV.2.(b)(3). Application Article IV: Allocation.
Any taxpayer subject to the taxing jurisdiction of this state shall allocate all of its nonbusiness income or loss within or without this state in accordance with Article IV.4 through IV.8.
Reg. IV.2.(c). Consistency and Uniformity in Reporting.
(1) Year-to-year consistency. In filing returns with this state, if the taxpayer departs from or modifies the manner in which income has been classified as business income or nonbusiness income in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
(2) State-to-state consistency. If the returns or reports filed by a taxpayer for all states to which the taxpayer reports under Article IV of this Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the classification of income as business or nonbusiness income, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
Reg. IV.3.(a). Taxable in Another State.
(1) In general. Under Article IV. 2. the taxpayer is subject to the allocation and apportionment provisions of Article IV if it has income from business activity that is taxable both within and without this state. A taxpayer's income from business activity is taxable without this state if such taxpayer, by reason of such business activity (i.e., the transactions and activity occurring in the regular course of a particular trade or business), is taxable in another state within the meaning of Article IV.3.
(2) Applicable tests. A taxpayer is taxable within another state if it meets either one of two tests: (1) If by reason of business activity in another state the taxpayer is subject to one of the types of taxes specified in Article IV.3.(1), namely: A net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) If by reason of such business activity another state has jurisdiction to subject the taxpayer to a net income tax, regardless of whether or not the state imposes such a tax on the taxpayer.
(3) Producing nonbusiness income. A taxpayer is not taxable in another state with respect to a particular trade or business merely because the taxpayer conducts activities in such other state pertaining to the production of nonbusiness income or business activities relating to a separate trade or business.
Reg. IV.3.(b). Taxable in Another State: When a Corporation Is “Subject to” a Tax under Article IV.3.(1).
(1) A taxpayer is “subject to” one of the taxes specified in Article IV.3.(1) if it carries on business activities in such state and such state imposes such a tax thereon. Any taxpayer which asserts that it is subject to one of the taxes specified in Article IV.3.(1) in another state shall furnish to the executive director upon his request evidence to support such assertion. The executive director may request that such evidence include proof that the taxpayer has filed the requisite tax return in such other state and has paid any taxes imposed under the law of such other state; the taxpayer's failure to produce such proof may be taken into account in determining whether the taxpayer in fact is subject to one of the taxes specified in Article IV.3.(1) in such other state.
(2) Voluntary tax payment. If the taxpayer voluntarily files and pays one or more of such taxes when not required to do so by the laws of that state or pays a minimal fee for qualification, organization or for the privilege of doing business in that state, but (A) does not actually engage in business activity in that state, or (B) does actually engage in some business activity, not sufficient for nexus, and the minimum tax bears no relation to the taxpayer's business activity within such state, the taxpayer is not “subject to” one of the taxes specified within the meaning of Article IV.3.(1).
(3) Taxability. The concept of taxability in another state is based upon the premise that every state in which the taxpayer is engaged in business activity may impose an income tax even though every state does not do so. In states which do not, other types of taxes may be imposed as a substitute for an income tax. Therefore, only those taxes enumerated in Article IV.3.(1) which may be considered as basically revenue raising rather than regulatory measures shall be considered in determining whether the taxpayer is “subject to” one of the taxes specified in Article IV.3.(1) in another state.
Reg. IV.3.(c). Taxable in Another State: When a State Has Jurisdiction To Subject a Taxpayer to a Net Income Tax.
The second test, that of Article IV.3.(2), applies if the taxpayer's business activity is sufficient to give the state jurisdiction to impose a net income tax by reason of such business activity under the Constitution and statutes of the United States. Jurisdiction to tax is not present where the state is prohibited from imposing the tax by reason of the provisions of Public Law 86-272, 15 U.S.C.A. § §381–385. In the case of any “state” as defined in Article IV.1.(h), other than a state of the United States or political subdivision of such state, the determination of whether such “state” has jurisdiction to subject the taxpayer to a net income tax shall be made as though the jurisdictional standards applicable to a state of the United States applied in that “state.” If jurisdiction is otherwise present, such “state” is not considered as without jurisdiction by reason of the provisions of a treaty between that state and the United States.
Reg. IV.9. Apportionment Formula.
All business income of each trade or business of the taxpayer shall be apportioned to this state by use of the apportionment formula set forth in Article IV.9. The elements of the apportionment formula are the property factor (see Regulation IV.10.), the payroll factor (see Regulation IV.13.) and the sales factor (see Regulation IV.15.) of the trade or business of the taxpayer.
Reg. IV.10.(a). Property Factor: In General.
The property factor of the apportionment formula for each trade or business of the taxpayer shall include all real and tangible personal property owned or rented by the taxpayer and used during the tax period in the regular course of such trade or business. The term “real and tangible personal property” includes land, buildings, machinery, stocks of goods, equipment, and other real and tangible personal property but does not include coin or currency. Property used in connection with the production of nonbusiness income shall be excluded from the property factor. Property used both in the regular course of taxpayer's trade or business and in the production of nonbusiness income shall be included in the factor only to the extent the property is used in the regular course of taxpayer's trade or business. The method of determining that portion of the value to be included in the factor will depend upon the facts of each case. The property factor shall include the average value of property includable in the factor. (See Regulation IV.12.) Reg. IV.10.(b). Property Factor: Property Used for the Production of Business Income. Property shall be included in the property factor if it is actually used or is available for or capable of being used during the tax period in the regular course of the trade or business of the taxpayer. Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor. Property or equipment under construction during the tax period, (except inventoriable goods in process) shall be excluded from the factor until such property is actually used in the regular course of the trade or business of the taxpayer. If the property is partially used in the regular course of the trade or business of the taxpayer while under construction, the value of the property to the extent used shall be included in the property factor. Property used in the regular course of the trade or business of the taxpayer shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its conversion to the production of nonbusiness income, its sale, or the lapse of an extended period of time (normally, five years) during which the property is held for sale. Reg.IV.10.(c). Property Factor: Consistency and Uniformity in Reporting.
(1) Year-to-Year consistency. In filing returns with this state, if the taxpayer departs from or modifies the manner of valuing property, or of excluding or including property in the property factor, used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
(2) State-to-State uniformity. If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under Article IV of this Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the valuation of property and in the exclusion or inclusion of property in the property factor, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
Reg. IV.10.(d). Property Factor: Numerator.
The numerator of the property factor shall include the average value of the real and tangible personal property owned or rented by the taxpayer and used in this state during the tax period in the regular course of the trade or business of the taxpayer. Property in transit between locations of the taxpayer to which it belongs shall be considered to be at the destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a taxpayer in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination. The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which are located within and without this state during the tax period shall be determined for purposes of the numerator of the factor on the basis of total time within the state during the tax period. An automobile assigned to a traveling employee shall be included in the numerator of the factor of the state to which the employee's compensation is assigned under the payroll factor or in the numerator of the state in which the automobile is licensed.
Reg. IV.11.(a). Property Factor: Valuation of Owned Property.
(1) Property owned by the taxpayer shall be valued at its original cost. As a general rule “original cost” is deemed to be the basis of the property for federal income tax purposes (prior to any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, etc.
If original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of acquisition by the taxpayer.
(2) Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes.
(3) Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes.
Reg. IV.11.(b). Property Factor: Valuation of Rented Property.
(1) Multiplier. Property rented by the taxpayer is valued at eight times its net annual rental rate. The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for such property, less the aggregate annual subrental rates paid by subtenants of the taxpayer. (See Regulation IV.18 (b) for special rules where the use of such net annual rental rate produces a negative or clearly inaccurate value or where property is used by the taxpayer at no charge or rented at a nominal rental rate.)
Subrentals. Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing such income. Accordingly there is no reduction in its value.
(2) “Annual rental rate” is the amount paid as rental for property for a 12-month period (i.e., the amount of the annual rent). Where property is rented for less than a 12-month period, the rent paid for the actual period of rental shall constitute the “annual rental rate” for the tax period. However, where a taxpayer has rented property for a term of 12 or more months and the current tax period covers a period of less than 12 months (due, for example, to a reorganization or change of accounting period), the rent paid for the short tax period shall be annualized. If the rental term is for less than 12 months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month-to-month basis.
(3) “Annual rent” is the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes:
(A) Any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.
(B) Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities, janitor services, etc. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items.
“Annual rent” does not include incidental day-to-day expenses.
(4) Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor.
Reg. IV.12. Property Factor: Averaging Property Values. As a general rule the average value of property owned by the taxpayer shall be determined by averaging the values at the beginning and ending of the tax period. However, the executive director may require or allow averaging by monthly values if such method of averaging is required to properly reflect the average value of the taxpayer's property for the tax period.
Averaging by monthly values will generally be applied if substantial fluctuations in the values of the property exist during the tax period or where property is acquired after the beginning of the tax period or disposed of before the end of the tax period.
Example: The monthly value of the taxpayer's property was as follows: January $2,000 July $15,000 February 2,000 August 17,000 March 3,000 September 23,000 April 3,500 October 25,000 May 4,500 November 13,000 June 10,000 December 2,000 . -------- . -------- . $25,000 . $95,000 . . . Total $120,000.
The average value of the taxpayer's property includable in the property factor for the income year is determined as follows:
$ 120,000 = $10,000 12 .
Averaging with respect to rented property is achieved automatically by the method of determining the net annual rental rate of such property asset forth in Reg. IV.11.(b).
Reg. IV.13.(a). Payroll Factor: in General (1) The payroll factor of the apportionment formula for each trade or business of the taxpayer shall include the total amount paid by the taxpayer in the regular course of its trade or business for compensation during the tax period.
(2) The total amount “paid” to employees is determined upon the basis of the taxpayer's accounting method, if the taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. Notwithstanding the taxpayer's method of accounting, at the election of the taxpayer, compensation paid to employees may be included in the payroll factor by use of the cash method if the taxpayer is required to report such compensation under such method for unemployment compensation purposes.
(3) The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the factor.
(4) The term “compensation” means wages, salaries, commissions and any other form of remuneration paid to employees for personal services. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services provided that such amounts constitute income to the recipient under the federal Internal Revenue Code. In the case of employees not subject to the federal Internal Revenue Code, e.g., those employed in foreign countries, the determination of whether such benefits or services would constitute income to the employees shall be made as though such employees were subject to the federal Internal Revenue Code.
(5) The term “employee” means (A) any officer of a corporation, or (B) any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person will be considered to be an employee if he is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act; except that, since certain individuals are included within the term “employees” in the Federal Insurance Contributions Act who would not be employees under the usual common-law rules, it may be established that a person who is included as an employee for purposes of the Federal Insurance Contributions Act is not an employee for purposes of this regulation.
(6) Consistency and Uniformity in Reporting.
(A) Year-to-Year Consistency. In filing returns with this state, if the taxpayer departs from or modifies the treatment of compensation paid used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
(B) State-to-State uniformity. If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under Article IV of this Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the treatment of compensation paid, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
Reg. IV.13.(b). Payroll Factor: Denominator.
The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is immune from taxation, for example, by Public Law 86-272, is included in the denominator of the payroll factor.
Reg. IV.13.(c). Payroll Factor: Numerator.
The numerator of the payroll factor is the total amount paid in this state during the tax period by the taxpayer for compensation. The tests in Article IV.14. to be applied in determining whether compensation is paid in this state are derived from the Model Unemployment Compensation Act. Accordingly, if compensation paid to employees is included in the payroll factor by use of the cash method of accounting or if the taxpayer is required to report such compensation under such method for unemployment compensation purposes, it shall be presumed that the total wages reported by the taxpayer to this state for unemployment compensation purposes constitute compensation paid in this state except for compensation excluded under Regulation IV.13.(a) through IV.14. The presumption may be overcome by satisfactory evidence that an employee's compensation is not properly reportable to this state for unemployment compensation purposes.
Reg. IV.14. Payroll Factor: Compensation Paid in this State. Compensation is paid in this state if any one of the following tests, applied consecutively, are met:
(1) The employee's service is performed entirely within the state.
(2) The employee's service is performed both within and without the state, but the service performed without the state is incidental to the employee's service within the state. The word “incidental” means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction.
(3) If the employee's services are performed both within and without this state, the employee's compensation will be attributed to this state:
(A) if the employee's base of operations is in this state; or (B) if there is no base of operations in any state in which some part of the service is performed, but the place from which the service is directed or controlled is in this state; or (C) if the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed but the employee's residence is in this state.
(4) The term “base of operations” is the place of more or less permanent nature from which the employee starts his work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his customers or other persons or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his trade or profession at some other point or points.
(5) The term “place from which the service is directed or controlled” refers to the place from which the power to direct or control is exercised by the taxpayer.
Reg. IV.15.(a). Sales Factor.
(1) In General. Article IV 1.(g) defines the term “sales” to mean all gross receipts of the taxpayer not allocated under paragraphs (5) through (8) of Article IV. Thus, for the purposes of the sales factor of the apportionment formula for each trade or business of the taxpayer, the term “sales” means all gross receipts derived by the taxpayer from transactions and activity in the regular course of such trade or business. The following are rules for determining “sales” in various situations:
(A) In the case of a taxpayer engaged in manufacturing and selling or purchasing and reselling goods or products, “sales” includes all gross receipts from the sales of such goods or products (or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the tax period) held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business. Gross receipts for this purpose means gross sales less returns and allowances, and includes all interest income, service charges, carrying charges, or time-price differential charges incidental to such sales. Federal and state excise taxes (including sales taxes) shall be included as part of such receipts if such taxes are passed on to the buyer or included as part of the selling price of the product.
(B) In the case of cost-plus-fixed fee contracts, such as the operation of a government-owned plant for a fee, “sales” includes the entire reimbursed cost, plus the fee.
(C) In the case of a taxpayer engaged in providing services, such as the operation of an advertising agency, or the performance of equipment service contracts, research and development contracts, “sales” includes the gross receipts from the performance of such services including fees, commissions, and similar items.
(D) In the case of a taxpayer engaged in renting real or tangible property, “sales” includes the gross receipts from the rental, lease, or licensing the use of the property.
(E) In the case of a taxpayer engaged in the sale, assignment, or licensing of intangible personal property such as patents and copyrights, “sales” includes the gross receipts therefrom.
(F) If a taxpayer derives receipts from the sale of equipment used in its business, such receipts constitute “sales.”
(2) Exceptions. In some cases certain gross receipts should be disregarded in determining the sales factor in order that the apportionment formula will operate fairly to apportion to this state the income of the taxpayer's trade or business (See Regulation IV.18(c).) (3) Consistency and Uniformity in Reporting.
(A) Year-to-year consistency. In filing returns with this state, if the taxpayer departs from or modifies the basis for excluding or including gross receipts in the sales factor used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
(B) State-to-State uniformity. If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under Article IV of this Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the inclusion or exclusion of gross receipts, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
Reg. IV.15.(b). Sales Factor: Denominator.
The denominator of the sales factor shall include the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business, except receipts excluded under Regulation IV.18.(c).
Reg. IV.15.(c). Sales Factor: Numerator.
The numerator of the sales factor shall include gross receipts attributable to this state and derived by the taxpayer from transactions and activity in the regular course of its trade or business. All interest income, service charges, carrying charges, or time-price differential charges incidental to such gross receipts shall be included regardless of (1) the place where the accounting records are maintained or (2) the location of the contract or other evidence of indebtedness.
Reg. IV.16.(a). Sales Factor: Sales of Tangible Personal Property in this State.
(1) Gross receipts from sales of tangible personal property (except sales to the United States Government; see Regulation IV.16.(b)) are in this state:
(A) if the property is delivered or shipped to a purchaser within this state regardless of the f.o.b. point or other conditions of sale; or (B) if the property is shipped from an office, store, warehouse, factory, or other place of storage in this state and the taxpayer is not taxable in the state of the purchaser.
(2) Property shall be deemed to be delivered or shipped to a purchaser, within this state if the recipient is located in this state, even though the property is ordered from outside this state.
(3) Property is delivered or shipped to a purchaser within this state if the shipment terminates in this state, even though the property is subsequently transferred by the purchaser to another state.
(4) The term “purchaser within this state” shall include the ultimate recipient of the property if the taxpayer in this state, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this state.
(5) When property being shipped by a seller from the state of origin to a consignee in another state is diverted while enroute to a purchaser in this state, the sales are in this state.
(6) If the taxpayer is not taxable in the state of the purchaser, the sale is attributed to this state if the property is shipped from an office, store, warehouse, factory, or other place of storage in this state.
(7) If a taxpayer whose salesman operates from an office located in this state makes a sale to a purchaser in another state in which the taxpayer is not taxable and the property is shipped directly by a third party to the purchaser, the following rules apply:
(A) If the taxpayer is taxable in the state from which the third party ships the property, then the sale is in such state.
(B) If the taxpayer is not taxable in the state from which the property is shipped, then the sale is in this state.
Reg. IV.16.(b). Sales Factor: Sales of Tangible Personal Property to United States Government in this State.
(1) Gross receipts from sales of tangible personal property to the United States Government are in this state if the property is shipped from an office, store, warehouse, factory, or other place of storage in this state. For the purpose of this regulation, only sales for which the United States Government makes direct payment to the seller pursuant to the terms of a contract constitute sales to the United States Government. Thus, as a general rule, sales by a subcontractor to the prime contractor, the party to the contract with the United States Government, do not constitute sales to the United States Government.
Reg. IV.17. Sales Factor: Sales Other than Sales of Tangible Personal Property in this State.
(1) In General, Article IV.17. provides for the inclusion in the numerator of the sales factor of gross receipts from transactions other than sales of tangible personal property (including transactions with the United States Government); under this section gross receipts are attributed to this state if the income-producing activity which gave rise to the receipts is performed wholly within this state. Also, gross receipts are attributed to this state if, with respect to a particular item of income, the income-producing activity is performed within and without this state but the greater proportion of the income producing activity is performed in this state, based on costs of performance.
(2) Income-Producing Activity: Defined. The term “income producing activity” applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gains or profit. Such activity does not include transactions and activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, income-producing activity includes but is not limited to the following:
(A) The rendering of personal services by employees or the utilization of tangible and intangible property by the taxpayer in performing a service.
(B) The sale, rental, leasing, licensing or other use of real property.
(C) The rental, leasing, licensing or other use of tangible personal property.
(D) The sale, licensing or other use of intangible personal property. The mere holding of intangible personal property is not, of itself, an income-producing activity.
(3) Costs of Performance: Defined. The term “costs of performance” means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer.
(4) Application.
(A) In General. Receipts (other than from sales of tangible personal property) in respect to a particular income-producing activity are in this state if:
(a) the income-producing activity is performed wholly within this state; or (b) the income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.
(B) Special Rules. The following are special rules for determining when receipts from the income-producing activities described below are in this state:
(a) Gross receipts from the sale, lease, rental or licensing of real property are in this state if the real property is located in this state.
(b) Gross receipts from the rental, lease, or licensing of tangible personal property are in this state if the property is located in this state. The rental, lease, licensing or other use of tangible personal property in this state is a separate income- producing activity from the rental, lease, licensing or other use of the same property while located in another state; consequently, if property is within and without this state during the rental, lease or licensing period, gross receipts attributable to this state shall be measured by the ratio which the time the property was physically present or was used in this state bears to the total time or use of the property everywhere during such period.
(c) Gross receipts for the performance of personal services are attributable to this state to the extent such services are performed in this state. If services relating to a single item of income are performed partly within and partly without this state, the gross receipts for the performance of such services shall be attributable to this state only if a greater proportion of the services was performed in the state, based on costs of performance. Usually, where services are performed partly within and partly without this state, the services performed in each state will constitute a separate income-producing activity; in such case the gross receipts for the performance of services attributable to this state shall be measured by the ratio which the time spent in performing such services in this state bears to the total time spent in performing such services everywhere. Time spent in performing services includes the amount of time expended in the performance of a contract or other obligation which gives rise to such gross receipts. Personal service not directly connected with the performance of the contract or other obligation, as for example time expended in negotiating the contract, is excluded from the computations.
Reg. IV.18(a). Special Rules.
(1) In General. Article IV.18 provides that, if the allocation and apportionment provisions of Article IV do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the executive director may require in respect to all or any part of the taxpayer's business activity, if reasonable:
(A) separate accounting;
(B) the exclusion of any one or more of the factors;
(C) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (D) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.
(2) Art. IV.18. permits a departure from the allocation and apportionment provisions of Article IV only in limited and specific cases. Article IV.18. may be invoked only in specific cases where unusual fact situations (which ordinarily will be unique and nonrecurring) produce incongruous results under the apportionment and allocation provisions contained in Article IV.
(3) In the case of certain industries, the foregoing regulations in respect to the apportionment formula do not set forth appropriate procedures for determining the apportionment factors. Nothing in Article IV.18. or in this Regulation IV.18. shall preclude the executive director from establishing appropriate procedures under Article IV.10 through 17, for determining the apportionment actors for each such industry, but such procedures shall be applied uniformly.
Reg. IV.18.(b). Special Rules: Property Factor.
The following special rules are established in respect to the property factor of the apportionment formula:
(1) If the subrents taken into account in determining the net annual rental rate under Regulation IV.11.(b) produce a negative or clearly inaccurate value for any item of property, another method which will properly reflect the value of rented property may be required by the executive director or requested by the taxpayer.
In no case however shall such value be less than an amount which bears the same ratio to the annual rental rate paid by the taxpayer for such property as the fair market value of that portion of the property used by the taxpayer bears to the total fair market value of the rented property.
(2) If property owned by others is used by the taxpayer at no charge or rented by the taxpayer for a nominal rate, the net annual rental rate for such property shall be determined on the basis of a reasonable market rental rate for such property.
Reg. IV.18.(c). Special Rules: Sales Factor.
The following special rules are established in respect to the sales factor of the apportionment formula:
(1) Where substantial amounts of gross receipts arise from an incidental or occasional sale of a fixed asset used in the regular course of the taxpayer's trade or business, such gross receipts shall be excluded from the sales factor.
(2) Insubstantial amounts of gross receipts arising from incidental or occasional transactions or activities may be excluded from the sales factor unless such exclusion would materially affect the amount of income apportioned to this state.
(3) Where business income from intangible property cannot readily be attributed to any particular income- producing activity of the taxpayer, such income cannot be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor.
(4) Where the income-producing activity in respect to business income from intangible personal property can be readily identified, such income is included in the denominator of the sales factor and, if the income-producing activity occurs in this state, in the numerator of the sales factor as well. SPECIAL REGULATIONS INCOME TAX RAILROADS The following special regulations are established in respect to railroads.
I. When allocating and apportioning income in accordance with the provisions of article IV of the Multistate Tax Compact, 24-60-1301 CRS 1973, as amended:
A. In General. Where a railroad has income from sources both within and without this state, the amount of business income from sources within this state shall be determined pursuant to this regulation. In such cases, the first step is to determine what portion of the railroad's income constitutes “business” income and which portion constitutes “nonbusiness” income under Article IV.1 and Reg. IV.1 thereunder. Nonbusiness income is directly allocable to specific states pursuant to the provisions of Article IV.5 to Article IV.8, inclusive. Business income is apportioned among the states in which the business is conducted pursuant to the property, payroll, and sales apportionment factors set forth in this regulation. The sum of (1) the items of nonbusiness income directly allocated to this state, plus (2) the amount of business income attributable to this state constitutes the amount of the taxpayer's entire net income which is subject to tax by this state.
B. Business and Nonbusiness Income. For definitions, rules and examples for determining business and nonbusiness income, see Reg. IV.1.
C. Apportionment of Business Income.
1. The Property Factor.
a. In General. The property factor shall be determined in accordance with Reg. IV.10.–.12., inclusive, the payroll factor in accordance with Reg. IV.13.–.14., and the sales factor in accordance with Reg. IV.15.–.17, inclusive, except as modified in this regulation.
b. The Denominator and Numerator of the Property Factor. In determining the numerator of the property factor, all property except mobile or movable property such as passenger cars, freight cars, locomotives, and freight containers which are located within and without this state during the income year shall be included in the numerator of the property factor in accordance with Article IV.10.–.12., inclusive, and Reg. IV.10.–.12., inclusive.
2. The Payroll Factor. The denominator of the payroll factor is the total compensation paid everywhere by the taxpayer during the income year for the production of business income. (See Article IV.13.–.14. and Reg. IV.13.–.14.) The numerator of the payroll factor is the total amount paid in this state during the income year by the taxpayer for compensation. With respect to all personnel except enginemen and trainmen performing services on interstate trains, compensation paid to such employees shall be included in the numerator as provided in Article IV.13.–.14. and Reg. IV.13.–.14.
With respect to enginemen and trainmen performing services on interstate trains, compensation paid to such employees shall be included in the numerator of the payroll factor in the ratio which their services are performed in this state bear to their services performed everywhere. Compensation for services performed in this state shall be deemed to be the compensation reported or required to be reported by such employees for determination of their income tax liability to this state.
3. The Sales (Revenue) Factor.
a. In General. All revenue derived from transactions and activities in the regular course of the trade or business of the taxpayer which produces business income, except per diem and mileage charges which are collected by the taxpayer, is included in the denominator of the revenue factor. (See Article IV.1. and Reg. IV.1.)
b. Numerator of Sales (Revenue) Factor from Freight, Mail, and Express. The total revenue of the taxpayer in this state during the income year for the numerator of the revenue factor from hauling freight, mail and express shall be attributable to this state as follows:
c. Numerator of Sales (Revenue) Factor from Passengers. The numerator of the sales (revenue) factor shall include:
II. When apportioning income in accordance with the provisions of 39-22-303 CRS 1973 as amended:
A. The Property Factor. The numerator and the denominator of the property factor shall be determined in the same manner as set forth in part I with the following exceptions:
1. Real property rented by the railroad is valued at eight (8) times the net annual rental rate. Tangible personal property rented by the railroad is valued at three (3) times the net annual rental rate.
2. The property owned by the railroad may be valued at its original cost or at its adjusted basis for federal income tax purposes in accordance with 39-22-303(3), CRS 1973 as amended.
B. The Sales (Revenue) Factor. The numerator and the denominator of the sales (revenue) factor shall be determined in the same manner as set forth in part I. THESE SPECIAL REGULATIONS ARE PROMULGATED TO BETTER PROVIDE FOR A SPECIFIC BUSINESS AND SPECIAL CIRCUMSTANCES. THEY SHALL APPLY IN ADDITION TO AND HAVE THE SAME EFFECT AS THE NUMBERED REGULATIONS.
AIRLINES The following special regulations are established in respect to airlines:
I. When allocating and apportioning income in accordance with the provisions of article IV of the Multistate Tax Compact, 24-60-1301, C.R.S. 1973, as amended.
A. In General An airline that has income from sources both within and without Colorado shall determine income in accordance with this regulation. Income shall first be categorized as to “business” or “nonbusiness” income pursuant to Article IV.1 and Regulation IV.1. Nonbusiness income will be directly allocated to specific states in accordance with Article IV.5 to Article IV.8 inclusive. Business income will be apportioned to those states in which business is conducted based on the property, payroll and sales apportionment factors as set forth in this regulation. The amount of net income subject to tax by Colorado will be the sum of (1) the amount of nonbusiness income allocated to Colorado plus (2) the amount of business income attributable to Colorado.
B. Business and Nonbusiness Income For definitions and rules for determining business and nonbusiness income, see Regulation IV.I.
C. Apportionment of Business Income The same method in the reporting of items for all factors must be consistent for both the numerator and denominator.
1. The Property Factor a. Property Valuation Owned property shall be valued at its original cost and rented property shall be valued at eight (8) times the net annual rental rate in accordance with Article IV.11 and Regulation IV.11. The use of the taxpayer's owned or rented aircraft in an exchange program with another air carrier will not constitute a rental or subrental. Such aircraft shall be accounted for in the property factor of the taxpayer. Rotables, parts and other expendables, including parts for use in contract overhaul work, will be valued at cost.
b. General Definitions The following definitions will be for both the numerator and denominator of the property factor:
c. The Denominator and Numerator of the Property Factor Both the denominator and the numerator of the property factor shall include the average value of all real and tangible personal property owned or rented and used by the taxpayer during the tax period. Aircraft held for resale will not be included. Rotables, parts and other expendables including parts for use in contract overhaul work will be valued at cost and assigned where the property is located. Aircraft ready for flight shall be included in the numerator as follows:
2. The Payroll Factor The denominator of the payroll factor is the total compensation paid everywhere by the taxpayer during the income year. (See Article IV.13 and Article IV.14 and Regulation IV.13 and Regulation IV.14) The numerator of the payroll factor is the total amount paid in this State during the tax period by the taxpayer for compensation. With respect to nonflight personnel, compensation paid to such employees shall be included in the numerator as provided in Article IV.13 and Article IV.14 and Regulation IV.13 and Regulation IV.14. With respect to flight personnel (the air crew aboard an aircraft assisting in the operation of the aircraft or the welfare of the passengers while in the air), compensation paid to such employees shall be included in the same ratio as the property factor for “aircraft ready for flight” in 1 (c) (i) and (ii) above.
3. Sales (Revenue) Factor All revenue derived from transactions and activities in the regular course of the trade or business of the taxpayer which produces business income is included in the denominator of the revenue factor. (See Article IV.1 andRegulation IV.1.) The numerator of the revenue factor is the total revenue of the taxpayer in this State during the income year. In determining the numerator of the revenue factor, revenue for hauling passengers, freight, mail, and excess baggage shall be attributed to this State based upon the same ratio as the property factor in “aircraft ready for flight” in 1 (c) (i) and (ii) above. Airtime, arrivals, and departures by type of aircraft shall be used in computing revenue attributable to this State derived from hauling passengers, freight, and mail. Receipts from the other business activities shall be included in the numerator in accordance with the statute.
If records of actual revenue by type of aircraft are not maintained, the total revenue shall be divided into passenger and freight (which shall include express, excess baggage and mail) revenue and allocated to aircraft type on the ratio of the revenue passenger ton-miles and revenue freight (which shall include express, excess baggage and mail) ton-miles of such type, respectively. Expressed as a formula, the computation for each type of aircraft would be Miles by Type . . .
____________________ x Revenue = ______________ Total Revenue Passenger . . .
. . . .
Revenue Freight Ton- . . .
Miles by Type ____________________ x Total Freight Revenue = ______________ Total Revenue Freight . . .
Ton-Miles All Types II. When apportioning income in accordance with the provisions 39-22-303 C.R.S. 1973, as amended, the only deviations allowed from the provisions of 39-22-303 are:
A. The Property Factor The numerator and the denominator of the property factor shall be determined in the same manner as set forth in part I with the following exceptions:
1. Real property rented by the airline is valued at eight (8) times the net annual rental rate. Tangible personal property rented by the airline is valued at three (3) times the net annual rental rate.
2. The property owned by the airline may be valued at its original cost or at its adjusted basis for federal income tax purpose in accordance with 39-22-303 (3) C.R.S. 1973 as amended.
3. Construction in progress is to be included.
B. The Sales (Revenue) Factor The numerator and the denominator of the sales (revenue) factor shall be determined in the same manner as set forth in part I. If in addition to the apportionment of business income above the taxpayer has non-business income under part I, such income shall be included in the numerator and denominator in accordance with the provisions of 39-22- 303.
CONTRACTORS The following special regulations apply to contractors who elect to report income using the completed contract method; provided, however, that:
a) such regulations shall apply only to contracts having an effective date on or after January 1, 1985; and b) with respect to contracts with a gross revenue of $100,000 or less, such regulations shall apply only at the option of the taxpayer.
I. When allocating and apportioning income in accordance with the provisions of Article IV of the Multistate Tax Compact, 24-60-1301, C.R.S.:
A. In General A contractor who has income from sources both within and without Colorado and elects to report income using the completed contract method, shall determine income in accordance with this regulation. Net income shall first be categorized as to “business” or “non-business” pursuant to Article IV.1 and Regulation IV.1. Net non-business income will be directly allocated to specific states in accordance with Article IV.5 to Article IV.8 inclusive. Gross profits from completed contracts, business administrative income and business administrative expense will be apportioned to those states in which business is conducted based on property, payroll and revenue apportionment factors as set forth in this regulation. The amount of net income subject to tax by Colorado will be the sum of (1) the gross profit from completed contracts apportioned to Colorado less business administrative expense apportioned to Colorado plus (2) other business income apportioned to Colorado which is not directly attributable to completed contracts plus (3) the amount of non-business income allocated to Colorado.
B. General Definitions 1. “Job” means a long-term contract entered into to build, construct, install or manufacture which will not be completed within the tax year in which it is entered into. As used in this regulation a “job” will refer to only those contracts where a taxpayer elects to report income using the completed contract method.
2. “Job Revenue” means gross revenue recorded on the books in accordance with generally accepted accounting principles. Billings shall be adjusted for overbillings or underbillings whenever applicable.
3. “Job Costs” means costs recorded on the books as being paid or accrued that are directly attributable to a specific job.
4. “Job Profit or Loss” means the gross profit or loss attributable to a specific job, which is determined by subtracting “Job Costs” from “Job Revenue.” 5. “Gross Profit Apportioned to Colorado” means Colorado's share of the sum of “Job Profits and Losses” of all jobs completed during a specific tax period.
6. “Administrative Expense Apportioned to Colorado” means Colorado's share of expense not directly attributable to a specific job.
C. Business and Non-business Income For definitions and rules for determining business and non-business income, see Regulation IV.1.
D. Apportionment Factors The same methods in reporting of items for all factors must be consistent for both the numerator and denominator.
1. Property Factor Property Valuation — Owned property shall be valued at its original cost and rented property shall be valued at eight (8) times the net annual rental rate in accordance with Article IV.11. Rent expense directly attributable to incomplete and completed jobs shall be capitalized in the numerator and denominator of the factor in the tax year in which it was paid or accrued.
2. Payroll Factor The denominator of the payroll factor is the total compensation paid everywhere by the taxpayer during the tax year. (See Article IV.13 and Article IV.14 and Regulation IV.13 and Regulation IV.14) The numerator of the payroll factor is the total amount paid in this state during the tax period by the taxpayer for compensation. Compensation directly attributable to incomplete and completed jobs shall be included in the numerator and denominator of the factor in the tax year in which it was paid or accrued.
3. Revenue Factor All revenue derived from transactions and activities in the regular course of the trade or business of the taxpayer which produces business income is included in the denominator of the revenue factor. (See Article IV.1 and Regulation IV.1) The numerator of the revenue factor is the total revenue of the taxpayer in this state during the tax year. When determining the denominator and numerator of the revenue factor, revenue directly attributable to contract jobs shall be included in the tax year on the the basis of progress billings and receipts from completed and incomplete contract. When determining the numerator the typical computation would be:
Total contract price for all . $ XXXXXX.
jobs completed in this state during the tax year . Plus .
Total progress payments . $ XXXXXX.
billed or received for all incomplete jobs in this state at the end of the tax year . Less .
Total progress payments . $(XXXXXX.)
billed or received in prior tax years for the above completed and incomplete jobs in this state . Equals __________ Total revenue directly . $ XXXXXX.
attributable to all jobs in this state during the tax year . Add .
Revenue from other . $ XXXXXX.
business activities in this state not directly attributable to jobs Numerator . $ XXXXXX.
The denominator of the revenue factor would be computed in the same manner for all jobs everywhere and include all other revenue from business activities not directly attributable to contract jobs.
E. Apportionment of Income and Expense Once the property, payroll and revenue factors have been determined and an average factor computed, income and expense shall be apportioned to this state as set forth in this regulation.
1. Gross Profit The gross profit of each and all jobs completed during the tax year shall be apportioned to this state by weighted factors. When determining the gross profit to be apportioned to Colorado from a job spanning a three year period, the typical computation would be:
Year 1 Percent of job completed x Average property, payroll during year 1 and revenue factor in year Year 2 Percent of job completed x Average property, payroll during year 2 and revenue factor in year Year 3 Percent of job completed x Average property, payroll during year 3 and revenue factor in year . . . .
. . . .
Gross profit from this job completed in year 3 would be apportioned to Colorado by a factor which is the sum of the weighted factors of years 1, 2, and 3.
2. Administrative Expense Administrative expense not directly attributable to jobs and not direct of related to allocated income shall be apportioned to Colorado by the average property, payroll and revenue factor.
3. Other Business Income Other business income not directly attributable to jobs shall be apportioned to Colorado by the average property, payroll and revenue factor.
F. Colorado Taxable Income Gross profit apportioned . $ XXXXX.
to Colorado from all jobs completed during the tax year . Less .
Administrative expense . ($ XXXXX.)
apportioned to Colorado . Plus .
Other business income . $ XXXXX.
apportioned to Colorado not directly related to jobs . Equal __________ Total taxable income . $ XXXXX.
apportioned to Colorado . Add .
Non-business income . $ XXXXX.
allocated to Colorado Colorado Taxable Income . $ XXXXX.
II. When apportioning income in accordance with the provisions of C.R.S., 39-22-303:
A. Section 39-22-303 makes no distinction between “business” and “nonbusiness” income, and provides that the entire net income shall be apportioned.
B. Income will be apportioned to Colorado via property and revenue factors rather than property, revenue and payroll factors.
1. Property Factor — The numerator and the denominator of the property factor shall be determined in the same manner as set forth in Part I with the following exceptions:
a. The property owned by the taxpayer may be valued at its original cost or its adjusted basis for federal income tax purposes in accordance with C.R.S., 39-22-303 b. Real property rented by the taxpayer is valued at eight (8) times the net annual rental rate. Tangible personal property rented by the taxpayer is valued at three (3) times the net annual rental rate.
c. Construction in progress is to be included.
2. Revenue Factor — The numerator and denominator of the revenue factor shall be determined in the same manner as set forth in Part I with the following exception: “Business” and “non-business” income that is not directly attributable to contract jobs, shall be included in the numerator and denominator in accordance with the provisions of C.R.S., 39-22-303 3. Apportionment of Income and Expense — Income and expense apportioned to Colorado shall be determined in the same manner as set forth in Part I, with the following exception:
There will be no directly allocated income. Income that is directly allocated to specific states in Part I, shall be apportioned in accordance with C.R.S., 39-22- 303.
Special Regulations Income Tax Basis: The statutory basis for these income tax regulations is C.R.S. 39-22-303(5). Purpose: The purpose of these regulations is to provide a standardized methodology for determining income tax apportionment factors for the trucking, publishing, and television and radio broadcasting industries.
Trucking Regulations The following special rules are established with respect to the apportionment of income for trucking companies:
I. When allocating and apportioning income in accordance with the provisions of Article IV of the Multistate Tax Compact, C.R.S. 24-60-1301:
A. In General. As used in this regulation, the term “trucking company” means a motor common carrier, a motor contract carrier, or an express carrier which primarily transports tangible personal property of others by motor vehicle for compensation. Where a trucking company has income from sources both within and without this state, the amount of business income from sources within this state shall be determined pursuant to this regulation. In such cases, the first step is to determine what portion of the trucking company's income constitutes “business” income and what portion constitutes “nonbusiness” income under Article IV.1 of the Multistate Tax Compact, C.R.S. 24- 601301, and Regulation IV.1 thereunder. Nonbusiness income is directly allocable to specific states pursuant to the provisions of Article IV.5 to Article IV.8, inclusive. Business income is apportioned among the states in which the business is conducted and pursuant to the property, payroll, and sales apportionment factors set forth in this regulation. The sum of (i) the items of nonbusiness income directly allocated to this state and (ii) the amount of business income attributable to this state constitutes the amount of the taxpayer's entire net income which is subject to tax in this state.
B. Business and Nonbusiness Income. For definitions, rules, and examples for determining business and nonbusiness income, see Regulation IV.1.
C. Apportionment of Business Income 1. In General. The property factor shall be determined in accordance with Regulation IV.10 to .12, inclusive, the payroll factor in accordance with Regulation IV.13 to . 14, and the sales factor in accordance with Regulation IV.15 to .17, inclusive, except as modified by this regulation.
2. The Property Factor a. Property Valuation. Owned property shall be valued at its original cost and property rented from others shall be valued at eight (8) times the net annual rental rate in accordance with Article IV.11 and Regulation IV.11.
b. General Definitions. The following definitions are applicable to the numerator and denominator of the property factor, as well as other apportionment factor descriptions:
c. The Denominator and Numerator of the Property Factor. The denominator of the property factor shall be the average value of all of the taxpayer's real and tangible personal property owned or rented and used during the income year. The numerator of the property factor shall be the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the income year. In the determination of the numerator of the property factor, all property, except mobile property as defined in this regulation, shall be included in the numerator of the property factor in accordance with Article IV.10 to Article IV.12, inclusive, and Regulation IV.10 to Regulation IV.12, inclusive. Mobile property, as defined in this regulation, which is located solely within this state during the income year shall be included in the numerator of the property factor.
3. The Payroll Factor. The denominator of the payroll factor is the compensation paid everywhere by the taxpayer during the income year for the production of business income. (See Article IV.13 and Article IV.14 and Regulation IV.13 and Regulation IV.14.) The numerator of the payroll factor is the total compensation paid in this state during the income year by the taxpayer. With respect to all personnel, except those performing services within and without this state, compensation paid to such employees shall be included in the numerator as provided in Article IV.13 and Article IV.14 and Regulation IV.13 andRegulation IV.14.
With respect to personnel performing services within and without this state, compensation paid to such employees shall be included in the numerator of the payroll factor in the ratio which their services performed in this state bear to their services performed everywhere based on mobile property miles.
4. The Sales (Revenue) Factor a. In General. All revenue derived from transactions and activities in the regular course of the taxpayer's trade or business which produce business income shall be included in the denominator of the revenue factor. (See Article IV.1 and Regulation IV.1.)
b. Numerator of the Sales (Revenue) Factor From Freight, Mail, and Express. The total revenue of the taxpayer attributable to this state during the income year from hauling freight, mail, and express shall be:
D. Records. The taxpayer shall maintain the records necessary to identify mobile property and to enumerate by state the mobile property miles traveled by such mobile property as those terms are used in this regulation. Such records are subject to review by the Department of Revenue or its agents.
E. De Minimis Nexus Standard. Notwithstanding any provision contained herein, this Regulation shall not apply to require the apportionment of income to this state if the trucking company during the course of the income tax year neither:
1. owns nor rents any real or personal property in this state, except mobile property; nor 2. makes any pick-ups or deliveries within this state; nor 3. travels more than twenty-five thousand mobile property miles within this state; provided that the total mobile property miles traveled within this state during the income tax year do not exceed three percent of the total mobile property miles traveled in all states by the trucking company during that period; nor 4. makes more than twelve trips into this state.
II. When apportioning income in accordance with the provisions C.R.S. 39-22-303:
A. The Property Factor. The numerator and the denominator of the property factor shall be determined in the same manner as set forth in part I with the following exceptions:
1. Real property rented by the taxpayer is valued at eight (8) times the net annual rental rate. Tangible personal property rented by the taxpayer is valued at three (3) times the net annual rental rate.
2. The property owned by the taxpayer may be valued at its original cost or at its adjusted basis for federal income tax purpose in accordance with C.R.S. 39-22- 303 (3).
B. The sales (Revenue Factor). The numerator and the denominator of the sales (revenue) factor shall be determined in the same manner as set forth in part I. If in addition to the apportionment of business income above the taxpayer has non-business income under part I, such income shall be included in the numerator and denominator in accordance with the provisions of C.R.S. 39-22-303.
Publishing Regulations The following special rules are established with respect to the apportionment of income derived from the publishing, sale, licensing or other distribution of books, newspapers, magazines, periodicals, trade journals or other printed material.
I. When allocating and apportioning income in accordance with the provisions of Article IV of the Multistate Tax Compact, C.R.S. 24-60-1301:
A. In General. Except as specifically modified by this regulation, when a person in the business of publishing, selling, licensing or distributing newspapers, magazines, periodicals, trade journals or other printed material has income from sources both within and without this state, the amount of business income from sources within this state from such business activity shall be determined pursuant to Article IV. of the Multistate Tax Compact, C.R.S. 24-60-1301, and the regulations adopted thereunder.
B. Definitions. The following definitions are applicable to the terms contained in this regulation, unless the context clearly requires otherwise.
1. “Outer-jurisdictional property” means certain types of tangible personal property, such as orbiting satellites, undersea transmission cables and the like, that are owned or rented by the taxpayer and used in the business of publishing, licensing, selling or otherwise distributing printed material, but which are not physically located in any particular state.
2. “Print or printed material” includes, without limitation, the physical embodiment or printed version of any thought or expression including, without limitation, a play, story, article, column or other literary, commercial, educational, artistic or other written or printed work. The determination of whether an item is or consists of print or printed material shall be made without regard to its content. Printed material may take the form of a book, newspaper, magazine, periodical, trade journal or any other form of printed matter and may be contained on any medium or property.
3. “Purchaser” and “Subscriber” mean the individual, residence, business or other outlet which is the ultimate or final recipient of the print or printed material. Neither of such terms shall mean or include a wholesaler or other distributor of print or printed material.
4. “Terrestrial facility” shall include any telephone line, cable, fiber optic, microwave, earth station, satellite dish, antennae or other relay system or device that is used to receive, transmit, relay or carry any data, voice, image or other information that is transmitted from or by any outer-jurisdictional property to the ultimate recipient thereof.
C. Apportionment of Business Income.
1. The Property Factor.
a. Property Factor Denominator.
b. Property Factor Numerator.
Value of property $3,000,000 permanently in state:
Value of mobile $1,041,096 property: 95/356 or (.260274) x $4,000,000:
Value of leased satellite $2,000,000 property used in-state:
(.02) x $100,000,000:
Total value of property $6,041,096 attributable to state:
Total property factor % : 1.2082% $6,041,096/ ($500,000,000):
2. The Payroll Factor.
The payroll factor shall be determined in accordance with Article IV.14. of the Multistate Tax Compact and the regulations promulgated thereunder.
3. The Sales Factor.
a. Sales Factor Denominator.
b. Sales Factor Numerator.
II. When apportioning income in accordance with the provisions C.R.S. 39-22-303:
A. The Property Factor. The numerator and the denominator of the property factor shall be determined in the same manner as set forth in part I with the following exceptions:
1. Real property rented by the taxpayer is valued at eight (8) times the net annual rental rate. Tangible personal property rented by the taxpayer is valued at three (3) times the net annual rental rate.
2. The property owned by the taxpayer may be valued at its original cost or at its adjusted basis for federal income tax purpose in accordance with C.R.S. 39-22- 303 (3).
B. The sales (Revenue Factor). The numerator and the denominator of the sales (revenue) factor shall be determined in the same manner as set forth in part I. If in addition to the apportionment of business income above the taxpayer has non-business income under part I, such income shall be included in the numerator and denominator in accordance with the provisions of C.R.S. 39-22-303.
Television and Radio Broadcasting Regulations The following special rules are established with respect to the apportionment of income from television and radio broadcasting.
I. When allocating and apportioning income in accordance with the provisions of Article IV of the Multistate Tax Compact, C.R.S. 24-60-1301:
A. In General. When a person in the business of conducting television or radio broadcasts, either through a network (including owned and affiliated stations) or through an affiliated, unaffiliated or independent television or radio broadcasting station, has income from sources both within and without this state, the amount of business income from sources within this state shall be determined pursuant to Article IV. of the Multistate Tax Compact, C.R.S. 24-60-1301, and the regulations issued thereunder by this state, except as modified by this regulation. This regulation shall also apply to telecasting by cable television systems.
B. Business and Nonbusiness Income. For definitions, regulations and examples for determining whether income shall be classified as “business” or “nonbusiness” income, see Reg. IV.1.
C. Definitions. The following definitions are applicable to the terms contained in this regulation, unless the context clearly requires otherwise.
1. “Film” or “film programming” means any and all performances, events or productions telecast, live or otherwise, on television, including but not limited to news, sporting events, plays, stories or other literary, commercial, educational or artistic works, in the format of a motion picture, a video tape, disc or other medium. Each episode of a series of films produced for television shall constitute a separate “film” notwithstanding that the series relates to the same principal subject and is produced during one or more television seasons.
2. “Outer-jurisdictional” property means certain types of tangible personal property, such as orbiting satellites, undersea transmission cables and the like, that are owned or rented by the taxpayer and used in the business of telecasting or broadcasting, but which are not physically located in any particular state.
3. “Radio” or “radio programming” means any and all performances, events or productions broadcast, live or otherwise, on radio, including but not limited to news, sporting events, plays, stories or other literary, commercial, educational or artistic works, in the format of an audio tape, disc or other medium. Each episode of a series of radio programming produced for radio broadcast shall constitute a separate “radio programming” notwithstanding that the series relates to the same principal subject and is produced during one or more tax periods.
4. “Release date” means the date on which a film is placed into service. A film is placed into service when it is first telecast to the primary audience for which the film was created. Thus, a film is placed in service when it is first publicly telecast for entertainment, educational, commercial, artistic or other purpose. Each episode of a television series is placed in service when it is first telecast. A film is not placed in service merely because it is completed and therefore in a condition or state of readiness and availability for telecast or, merely because it is telecast to prospective sponsors or purchasers, or is shown in preview before a select audience.
5. “Rent” shall include license fees or other payments or consideration provided in exchange for the broadcast or other use of television or radio programming.
6. A “subscriber” to a cable television system is the individual residence or other outlet which is the ultimate recipient of the transmission.
7. “Tangible personal property” used in the business, whether owned or rented, shall include, but not be limited to camera and sound equipment, sets, props, wardrobes, and other similar equipment or property, but shall not include film or radio programming.
8. “Telecast” or “broadcast” (used interchangeably) means the transmission of television or radio programming by an electronic signal conducted by radio waves or microwaves or by wires, lines, coaxial cables, wave guides, fiber optics, or other conduits of communications.
9. “United States” shall include and be limited to the fifty states, the District of Columbia, the Commonwealth of Puerto Rico and the possessions and territories thereof.
D. Apportionment of Business Income.
1. In General. The property factor shall be determined in accordance with Regulation IV.10 through 12., the payroll factor in accordance with Regulation IV.13. and 14., and the sales factor in accordance with Regulation IV.15. and 16., except as modified by this regulation.
2. The Property Factor.
a. In General
b. Property Factor Denominator.
c. Property Factor Numerator.
Value of mobile and $1,095,600 movable property:
(100/365 or .2739 X $4,000,000):
Total value of property to $3,095,600 be included in the state's property factor numerator without apportionment of outer-jurisdictional and film property:
Total value of property to $300,000,000 be used in the denominator ($500,000,000- $200,000,000)
Total property factor % .0103 ($3,095,600/$300,000,00 0):
3. The Payroll Factor.
a. Payroll Factor Denominator.
b. Payroll Factor Numerator.
4. The Sales Factor.
a. Sales Factor Denominator.
b. Sales Factor Numerator.
II. When apportioning income in accordance with the provisions C.R.S. 39-22-303:
A. The Property Factor. The numerator and the denominator of the property factor shall be determined in the same manner as set forth in part I with the following exceptions:
1. Real property rented by the taxpayer is valued at eight (8) times the net annual rental rate. Tangible personal property rented by the taxpayer is valued at three (3) times the net annual rental rate.
2. The property owned by the taxpayer may be valued at its original cost or at its adjusted basis for federal income tax purpose in accordance with C.R.S. 39-22- 303 (3).
B. The sales (Revenue Factor). The numerator and the denominator of the sales (revenue) factor shall be determined in the same manner as set forth in part I. If in addition to the apportionment of business income above the taxpayer has non-business income under part I, such income shall be included in the numerator and denominator in accordance with the provisions of C.R.S. 39-22-303.
Special Regulations Income Tax Financial Institution Regulations Basis: The statutory basis for these income tax regulations is C.R.S. 39-22303.1and 39-22-303(5). Purpose: The purpose of these regulations is to provide a uniform methodology for determining income tax apportionment factors for financial institutions.
I. When allocating and apportioning income in accordance with the provisions of Article IV of the Multistate Tax Compact, C.R.S. 24-60-1301:
Section 1. Apportionment and Allocation.
(a) Except as otherwise specifically provided, a financial institution whose business activity is taxable both within and without this state shall allocate and apportion its net income as provided in this regulation. All items of nonbusiness income (income which is not includable in the apportionable income tax base) shall be allocated pursuant to the provisions of Article IV, paragraphs 5 through 8 of the Multistate Tax Compact, C.R.S. 24-60-1301. A financial institution organized under the laws of a foreign country, the Commonwealth of Puerto Rico, or a territory or possession of the United States whose effectively connected income (as defined under the Federal Internal Revenue Code) is taxable both within this state and within another state, other than the state in which it is organized, shall allocate and apportion its net income as provided in this regulation.
(b) All business income (income which is includable in the apportionable income tax base) shall be apportioned to this state by multiplying such income by the apportionment percentage. The apportionment percentage is determined by adding the taxpayer's receipts factor (as described in Section 3 of this article), property factor (as described in Section 4 of this article), and payroll factor (as described in Section 5 of this article) together and dividing the sum by three. If one of the factors is missing, the two remaining factors are added and the sum is divided by two. If two of the factors are missing, the remaining factor is the apportionment percentage. A factor is missing if both its numerator and denominator are zero, but it is not missing merely because its numerator is zero.
(c) Each factor shall be computed according to the method of accounting (cash or accrual basis) used by the taxpayer for the taxable year.
(d) If the allocation and apportionment provisions of this regulation do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the executive director of the Department of Revenue (hereinafter referred to as “executive director” ) may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
(1) separate accounting;
(2) the exclusion of any one or more of the factors, (3) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this State; or (4) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.
Section 2. Definitions.
As used in this regulation, unless the context otherwise requires:
(a) “Billing address” means the location indicated in the books and records of the taxpayer on the first day of the taxable year (or on such later date in the taxable year when the customer relationship began) as the address where any notice, statement and/or bill relating to a customer's account is mailed.
(b) “Borrower or credit card holder located in this state” means:
(1) a borrower, other than a credit card holder, that is engaged in a trade or business which maintains its commercial domicile in this state; or (2) a borrower that is not engaged in a trade or business or a credit card holder whose billing address is in this state.
(c) “Commercial domicile” means:
(1) the headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed; or (2) if a taxpayer is organized under the laws of a foreign country, or of the Commonwealth of Puerto Rico, or any territory or possession of the United States, such taxpayer's commercial domicile shall be deemed for the purposes of this regulation to be the state of the United States or the District of Columbia from which such taxpayer's trade or business in the United States is principally managed and directed. It shall be presumed, subject to rebuttal, that the location from which the taxpayer's trade or business is principally managed and directed is the state of the United States or the District of Columbia to which the greatest number of employees are regularly connected or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the taxable year.
(d) “Compensation” means wages, salaries, commissions and any other form of remuneration paid to employees for personal services that are included in such employee's gross income under the Federal Internal Revenue Code. In the case of employees not subject to the Federal Internal Revenue Code, e.g., those employed in foreign countries, the determination of whether such payments would constitute gross income to such employees under the Federal Internal Revenue Code shall be made as though such employees were subject to the Federal Internal Revenue Code.
(e) “Credit card” means credit, travel or entertainment card.
(f) “Credit card issuer's reimbursement fee” means the fee a taxpayer receives from a merchant's bank because one of the persons to whom the taxpayer has issued a credit card has charged merchandise or services to the credit card.
(g) “Employee” means, with respect to a particular taxpayer, any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee of that taxpayer.
(h) “Financial institution” means:
(1) Any corporation or other business entity registered under state law as a bank holding company or registered under the Federal Bank Holding Company Act of 1956, as amended, or registered as a savings and loan holding company under the Federal National Housing Act, as amended;
(2) A national bank organized and existing as a national bank association pursuant to the provisions of the National Bank Act, 12 U.S.C. sections 21 et seq.;
(3) A savings association or federal savings bank as defined in the Federal Deposit Insurance Act, 12 U.S.C. section 1813(b)(1);
(4) Any bank or thrift institution incorporated or organized under the laws of any state;
(5) Any corporation organized under the provisions of 12 U.S.C.sections 611 to 631;
(6) Any agency or branch of a foreign depository as defined in 12 U.S.C. section 3101;
(7) A production credit association organized under the Federal Farm Credit Act of 1933, all of whose stock held by the Federal Production Credit Corporation has been retired;
(8) Any corporation whose voting stock is more than fifty percent (50%) owned, directly or indirectly, by any person or business entity described in subsections (1) through (7) above other than an insurance company taxable under C.R.S. 10-3-209;
(9) A corporation or other business entity that derives more than fifty percent (50%) of its total gross income for financial accounting purposes from finance leases. For purposes of this subsection, a “finance lease” shall mean any lease transaction which is the functional equivalent of an extension of credit and that transfers substantially all of the benefits and risks incident to the ownership of property. The phrase shall include any “direct financing lease” or “leverage lease” that meets the criteria of Financial Accounting Standards Board Statement No. 13, “Accounting for Leases” or any other lease that is accounted for as a financing by a lessor under generally accepted accounting principles. (The reference to Financial Accounting Standards Board Statement No.13 does not include later amendments or editions of this referenced material. Certified copies of this material are available for review in the executive director's office of the Department of Revenue at 1375 Sherman Street, Denver, Colorado 80261.)
(10) Any other person or business entity, other than an insurance company taxable under C.R.S. 10-3-209, which derives more than fifty percent (50%) of its gross income from activities that a person described in subsections (2) through (7) and (9) above is authorized to transact. For the purpose of this subsection, the computation of gross income shall not include income from non-recurring, extraordinary items.
(11) The executive director is authorized to exclude any person from the application of subsection (10) upon such person proving, by clear and convincing evidence, that the income-producing activity of such person is not in substantial competition with those persons described in subsections (2) through (7) and (9) above.
(i) “Gross rents” means the actual sum of money or other consideration payable for the use or possession of property. “Gross rents” shall include, but not be limited to:
(1) any amount payable for the use or possession of real property or tangible property whether designated as a fixed sum of money or as a percentage of receipts, profits or otherwise, (2) any amount payable as additional rent or in lieu of rent, such as interest, taxes, insurance, repairs or any other amount required to be paid by the terms of a lease or other arrangement, and (3) a proportionate part of the cost of any improvement to real property made by or on behalf of the taxpayer which reverts to the owner or lessor upon termination of a lease or other arrangement. The amount to be included in gross rents is the amount of amortization or depreciation allowed in computing the taxable income base for the taxable year. However, where a building is erected on leased land by or on behalf of the taxpayer, the value of the land is determined by multiplying the gross rent by eight and the value of the building is determined in the same manner as if owned by the taxpayer.
(4) The following are not included in the term “gross rents” :
(j) “Loan” means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another. Loans include participations, syndications, and leases treated as loans for federal income tax purposes. Loans shall not include: properties treated as loans under Section 595 of the Federal Internal Revenue Code; futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; non-interest bearing balances due from depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a REMIC, or other mortgage-backed or asset-backed security; and other similar items.
(k) “Loan secured by real property” means that fifty percent or more of the aggregate value of the collateral used to secure a loan or other obligation, when valued at fair market value as of the time the original loan or obligation was incurred, was real property.
(l) “Merchant discount” means the fee (or negotiated discount) charged to a merchant by the taxpayer for the privilege of participating in a program whereby a credit card is accepted in payment for merchandise or services sold to the card holder.
(m) “Participation” means an extension of credit in which an undivided ownership interest is held on a pro rata basis in a single loan or pool of loans and related collateral. In a loan participation, the credit originator initially makes the loan and then subsequently resells all or a portion of it to other lenders. The participation may or may not be known to the borrower.
(n) “Person” means an individual, estate, trust, partnership, corporation and any other business entity.
(o) “Principal base of operations” with respect to transportation property means the place of more or less permanent nature from which said property is regularly directed or controlled. With respect to an employee, the “principal base of operations” means the place of more or less permanent nature from which the employee regularly (1) starts his or her work and to which he or she customarily returns in order to receive instructions from his or her employer or (2) communicates with his or her customers or other persons, or (3) performs any other functions necessary to the exercise of his or her trade or profession at some other point or points.
(p) “Real property owned” and “tangible personal property owned” mean real and tangible personal property, respectively, (1) on which the taxpayer may claim depreciation for federal income tax purposes, or (2) property to which the taxpayer holds legal title and on which no other person may claim depreciation for federal income tax purposes (or could claim depreciation if subject to federal income tax). Real and tangible personal property do not include coin, currency, or property acquired in lieu of or pursuant to a foreclosure.
(q) “Regular place of business” means an office at which the taxpayer carries on its business in a regular and systematic manner and which is continuously maintained, occupied and used by employees of the taxpayer.
(r) “State” means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States or any foreign country.
(s) “Syndication” means an extension of credit in which two or more persons fund and each person is at risk only up to a specified percentage of the total extension of credit or up to a specified dollar amount.
(t) “Taxable” means either:
(1) that a taxpayer is subject in another state to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, a corporate stock tax (including a bank shares tax), a single business tax, or an earned surplus tax, or any tax which is imposed upon or measured by net income; or (2) that another state has jurisdiction to subject the taxpayer to any of such taxes regardless of whether, in fact, the state does or does not.
(u) “Transportation property” means vehicles and vessels capable of moving under their own power, such as aircraft, trains, water vessels and motor vehicles, as well as any equipment or containers attached to such property, such as rolling stock, barges, trailers or the like.
Section 3. Receipts Factor.
(a) General. The receipts factor is a fraction, the numerator of which is the receipts of the taxpayer in this state during the taxable year and the denominator of which is the receipts of the taxpayer within and without this state during the taxable year. The method of calculating receipts for purposes of the denominator is the same as the method used in determining receipts for purposes of the numerator. The receipts factor shall include only those receipts described herein which constitute business income and are included in the computation of the apportionable income base for the taxable year.
(b) Receipts from the lease of real property. The numerator of the receipts factor includes receipts from the lease or rental of real property owned by the taxpayer if the property is located within this state or receipts from the sublease of real property if the property is located within this state.
(c) Receipts from the lease of tangible personal property.
(1) Except as described in paragraph (2), of this subsection, the numerator of the receipts factor includes receipts from the lease or rental of tangible personal property owned by the taxpayer if the property is located within this state when it is first placed in service by the lessee.
(2) Receipts from the lease or rental of transportation property owned by the taxpayer are included in the numerator of the receipts factor to the extent that the property is used in this state. The extent an aircraft will be deemed to be used in this state and the amount of receipts that is to be included in the numerator of this state's receipts factor is determined by multiplying all the receipts from the lease or rental of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to used wholly in the state in which it is registered.
(d) Interest from loans secured by real property.
(1) The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans secured by real property if the property is located within this state. If the property is located both within this state and one or more other states, the receipts described in this subsection are included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within this state. If more than fifty percent of the fair market value of the real property is not located within any one state, then the receipts described in this subsection shall be included in the numerator of the receipts factor if the borrower is located in this state.
(2) The determination of whether the real property securing a loan is located within this state shall be made as of the time the original agreement was made and any and all subsequent substitutions of collateral shall be disregarded.
(e) Interest from loans not secured by real property. The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from loans not secured by real property if the borrower is located in this state.
(f) Net gains from the sale of loans. The numerator of the receipts factor includes net gains from the sale of loans. Net gains from the sale of loans includes income recorded under the coupon stripping rules of Section 1286 of the Internal Revenue Code.
(1) The amount of net gains (but not less than zero) from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (d) of this section and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
(2) The amount of net gains (but not less than zero) from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (e) of this section and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(g) Receipts from credit card receivables. The numerator of the receipts factor includes interest and fees or penalties in the nature of interest from credit card receivables and receipts from fees charged to card holders, such as annual fees, if the billing address of the card holder is in this state.
(h) Net gains from the sale of credit card receivables. The numerator of the receipts factor includes net gains (but not less than zero) from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (g) of this section and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(i) Credit card issuer's reimbursement fees. The numerator of the receipts factor includes all credit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (g) of this section and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(j) Receipts from merchant discount. The numerator of the receipts factor includes receipts from merchant discount if the commercial domicile of the merchant is in this state. Such receipts shall be computed net of any cardholder charge backs, but shall not be reduced by any interchange transaction fees or by any issuer's reimbursement fees paid to another for charges made by its card holders.
(k) Loan servicing fees.
(1)
(2) In circumstances in which the taxpayer receives loan servicing fees for servicing either the secured or the unsecured loans of another, the numerator of the receipts factor shall include such fees if the borrower is located in this state.
(l) Receipts from services. The numerator of the receipts factor includes receipts from services not otherwise apportioned under this section if the service is performed in this state. If the service is performed both within and without this state, the numerator of the receipts factor includes receipts from services not otherwise apportioned under this section, if a greater proportion of the income-producing activity is performed in this state based on cost of performance.
(m) Receipts from investment assets and activities and trading assets and activities.
(1) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities shall be included in the receipts factor. Investment assets and activities and trading assets and activities include but are not limited to: investment securities; trading account assets; federal funds; securities purchased and sold under agreements to resell or repurchase; options; futures contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in subparagraphs
(2) The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities described in paragraph
(3) In lieu of using the method set forth in paragraph (2) of this subsection, the taxpayer may elect, or the executive director may require in order to fairly represent the business activity of the taxpayer in this state, the use of the method set forth in this paragraph.
(4) If the taxpayer elects or is required by the executive director to use the method set forth in paragraph (3) of this subsection, it shall use this method on all subsequent returns unless the taxpayer receives prior permission from the executive director to use, or the executive director requires a different method.
(5) The taxpayer shall have the burden of proving that an investment asset or activity or trading asset or activity was properly assigned to a regular place of business outside of this state by demonstrating that the day-to- day decisions regarding the asset or activity occurred at a regular place of business outside this state. Where the day-to-day decisions regarding an investment asset or activity or trading asset or activity occur at more than one regular place of business and one such regular place of business is in this state and one such regular place of business is outside this state, such asset or activity shall be considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Unless the taxpayer demonstrates to the contrary, such policies and guidelines shall be presumed to be established at the commercial domicile of the taxpayer.
(n) All other receipts. The numerator of the receipts factor includes all other receipts pursuant to the provisions of Article IV of the Multistate Tax Compact, C.R.S. 24- 60-1301.
(o) Attribution of certain receipts to commercial domicile. All receipts which would be assigned under this section to a state in which the taxpayer is not taxable shall be included in the numerator of the receipts factor, if the taxpayer's commercial domicile is in this state.
Section 4. Property Factor.
(a) General. The property factor is a fraction, the numerator of which is the average value of real property and tangible personal property rented to the taxpayer that is located or used within this state during the taxable year, the average value of the taxpayer's real and tangible personal property owned that is located or used within this state during the taxable year, and the average value of the taxpayer's loans and credit card receivables that are located within this state during the taxable year, and the denominator of which is the average value of all such property located or used within and without this state during the taxable year.
(b) Property included. The property factor shall include only property the income or expenses of which are included (or would have been included if not fully depreciated or expensed, or depreciated or expensed to a nominal amount) in the computation of the apportionable income base for the taxable year.
(c) Value of property owned by the taxpayer.
(1) The value of real property and tangible personal property owned by the taxpayer is the original cost or other basis of such property for Federal income tax purposes without regard to depletion, depreciation or amortization.
(2) Loans are valued at their outstanding principal balance, without regard to any reserve for bad debts. If a loan is charged-off in whole or in part for Federal income tax purposes, the portion of the loan charged off is not outstanding. A specifically allocated reserve established pursuant to regulatory or financial accounting guidelines which is treated as charged- off for Federal income tax purposes shall be treated as charged-off for purposes of this section.
(3) Credit card receivables are valued at their outstanding principal balance, without regard to any reserve for bad debts. If a credit card receivable is charged-off in whole or in part for Federal income tax purposes, the portion of the receivable charged-off is not outstanding.
(d) Average value of property owned by the taxpayer. The average value of property owned by the taxpayer is computed on an annual basis by adding the value of the property on the first day of the taxable year and the value on the last day of the taxable year and dividing the sum by two. If averaging on this basis does not properly reflect average value, the executive director may require averaging on a more frequent basis. The taxpayer may elect to average on a more frequent basis. When averaging on a more frequent basis is required by the executive director or is elected by the taxpayer, the same method of valuation must be used consistently by the taxpayer with respect to property within and without this state and on all subsequent returns unless the taxpayer receives prior permission from the executive director or the executive director requires a different method of determining average value.
(e) Average value of real property and tangible personal property rented to the taxpayer.
(1) The average value of real property and tangible personal property that the taxpayer has rented from another and which is not treated as property owned by the taxpayer for Federal income tax purposes, shall be determined annually by multiplying the gross rents payable during the taxable year by eight.
(2) Where the use of the general method described in this subsection results in inaccurate valuations of rented property, any other method which properly reflects the value may be adopted by the executive director or by the taxpayer when approved in writing by the executive director. Once approved, such other method of valuation must be used on all subsequent returns unless the taxpayer receives prior approval from the executive director or the executive director requires a different method of valuation.
(f) Location of real property and tangible personal property owned by or rented to the taxpayer.
(1) Except as described in paragraph (2) of this subsection, real property and tangible personal property owned by or rented to the taxpayer is considered to be located within this state if it is physically located, situated or used within this state.
(2) Transportation property is included in the numerator of the property factor to the extent that the property is used in this state. The extent an aircraft will be deemed to be used in this state and the amount of value that is to be included in the numerator of this state's property factor is determined by multiplying the average value of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft everywhere. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.
(g) Location of loans.
(1)
(2) In the case of a loan which is assigned by the taxpayer to a place without this state which is not a regular place of business, it shall be presumed, subject to rebuttal by the taxpayer on a showing supported by the preponderance of evidence, that the preponderance of substantive contacts regarding the loan occurred within this state if, at the time the loan was made the taxpayer's commercial domicile, as defined by subsection (c) of Section 2, was within this state.
(3) To determine the state in which the preponderance of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as the solicitation, investigation, negotiation, approval and administration of the loan. The terms “solicitation” , “investigation” , “negotiation” , “approval” and “administration” are defined as follows:
(h) Location of credit card receivables. For purposes of determining the location of credit card receivables, credit card receivables shall be treated as loans and shall be subject to the provisions of subsection (g) of this section.
(i) Period for which properly assigned loan remains assigned. A loan that has been properly assigned to a state shall, absent any change of material fact, remain assigned to said state for the length of the original term of the loan. Thereafter, said loan may be properly assigned to another state if said loan has a preponderance of substantive contact to a regular place of business there. Section 5. Payroll Factor.
(a) General. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the taxable year by the taxpayer for compensation and the denominator of which is the total compensation paid both within and without this state during the taxable year. The payroll factor shall include only that compensation which is included in the computation of the apportionable income tax base for the taxable year.
(b) Compensation relating to nonbusiness income and independent contractors. The compensation of any employee for services or activities which are connected with the production of nonbusiness income (income which is not includable in the apportionable income base) and payments made to any independent contractor or any other person not properly classifiable as an employee shall be excluded from both the numerator and denominator of the factor.
(c) When compensation paid in this state. Compensation is paid in this state if any one of the following tests, applied consecutively, is met:
(1) The employee's services are performed entirely within this state.
(2) The employee's services are performed both within and without the state, but the service performed without the state is incidental to the employee's service within the state. The term “incidental” means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction.
(3) If the employee's services are performed both within and without this state, the employee's compensation will be attributed to this state:
II. When apportioning income in accordance with the provisions of C.R.S. 39-22-303:
A. C.R.S. 39-22-303 makes no distinction between “business” and “non-business” income, and provides that the entire net income shall be apportioned.
B. Income will be apportioned to Colorado using property and receipts factors rather than property, receipts and payroll factors.
1. Property factor:
The numerator and the denominator of the property factor shall be determined in the same manner as set forth in Part I with the following exceptions:
(a) Real property rented by the financial institution is valued at eight (8) times the net annual rate. Tangible personal property rented by the financial institution is valued at three (3) times the net annual rental rate.
(b) The property owned by the financial institution may be valued at its original cost or at its adjusted basis for federal income tax purpose in accordance with C.R.S. 39-22-303(3)
(c) Construction in progress is to be included.
2. Receipts factor:
The numerator and the denominator of the receipts factor shall be determined in the same manner as set forth in Part I. If in addition to the apportionment of business income above the taxpayer has non-business income under Part I, such income shall be included in the numerator and denominator in accordance with the provisions of C.R.S. 39-22-303.
_____________________________________________________ Editor’s Notes History Income Tax Special Regulations (Railroads, Airlines, Contractors, etc.) recodified from 1 CCR 201-2.