PURPOSE: This rule sets forth the uniform provisions concerning multistate allocation and apportionment of income from airlines which were enacted by the Multistate Tax Commission.

1. (1) General. When an airline has income from sources both within and without Missouri, the amount of business income from sources within Missouri shall be determined pursuant to section 32.200 (Article IV), RSMo of the Multistate Tax Commission except as modified by this rule, or unless the taxpayer elects to apportion pursuant to section 143.451.4, RSMo.

2. (2) Apportionment of Business Income.

   1. (A) General Definitions. The following definitions apply to the terms used in the apportionment factor descriptions:

      1. 1. Value of owned real and tangible personal property shall

mean its original cost (see section 32.200 (Article IV.11.), RSMo and the rules that interpret those provisions);

1. 2. Cost of aircraft by type means the average original cost

or value of aircraft by type which are ready for flight;

1. 3. Original cost means the initial federal tax basis of

the property plus the value of capital improvements to the property, except that, for this purpose, it shall be assumed that Safe Harbor Leases are not true leases and do not affect the original initial federal tax basis of the property (see 12 CSR 10-2.075);

1. 4. Average value of property means the amount determined

by averaging the values at the beginning and ending of the income year, but the Department of Revenue may require the averaging of monthly values during the income year if averaging is necessary to reflect properly the average value of the airline’s property (see section 32.200 (Article IV.12.), RSMo and the rules that interpret those provisions);

1. 5. The value of rented real and tangible personal property

means the product of eight (8) times the net annual rental rate (see section 32.200 (Article IV.11.), RSMo and the rules that interpret those provisions);

1. 6. Net annual rental rate means the annual rental rate paid

by the taxpayer;

1. 7. Property used during the income year includes property

which is available for use in the taxpayer’s trade or business during the income year;

1. 8. Aircraft ready for flight means aircraft owned or acquired

through rental or lease (but no interchange) which are in the possession of the taxpayer and are available for service on the taxpayer’s routes;

1. 9. Revenue service means the use of aircraft ready for

flight for the production of revenue;

1. 10. Transportation revenue means revenue earned by

transporting passengers, freight and mail as well as revenue earned from liquor sales, pet crate rentals, and the like; and

1. 11. Departures means all takeoffs, regularly scheduled or

charter flights, that occur during revenue service.

1. (B) Property Factor. Owned aircraft shall be valued at original cost and rented aircraft shall be valued at eight (8) times the net annual rental rate in accordance with section 32.200 (Article IV.11.), RSMo and the rules that interpret those provisions. The use of the taxpayer’s owned or rented aircraft in an interchange program with another air carrier will not constitute a rental of the aircraft by the airline to the other participating airline. These aircraft shall be accounted for in the property factor of the owner. Parts and other expendables, including parts for use in contract overhaul work, will be valued at cost.

2. (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 Missouri during the income year.

   1. 1. In determining the numerator of the property factor, all

property except aircraft ready for flight shall be included in the numerator of the property factor in accordance with section 32.200 (Article IV.10.–12.), RSMo. Aircraft ready for flight shall be included in the numerator of the property factor in the ratio calculated as follows: departures of aircraft from locations in Missouri weighted as to the cost and value of aircraft by type compared to total departures similarly weighted.

1. (D) The Payroll Factor. The denominator of the payroll factor is the total compensation paid everywhere by the taxpayer during the income year (see section 32.200 (Article IV.13. and 14.), RSMo). 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 nonflight personnel, compensation paid to these employees shall be included in the numerator as provided in section 32.200 (Article IV.13. and 14.), RSMo. With respect to flight personnel (the air crew aboard an aircraft assisting in the operations of the aircraft or the welfare of passengers while in the air), compensation paid to these employees shall be included in the ratio of departures of aircraft from locations in this state, weighted as to the cost and value of aircraft by type compared to total departures similarly weighted, multiplied by the total flight personnel compensation.
2. (E) Sales (Transportation Revenue) Factor. The transportation revenue derived from transactions and activities in the regular course of the trade or business of the taxpayer and miscellaneous sales of merchandise, and the like, are included in the denominator of the revenue factor (see section 32.200 (Article IV.1.), RSMo and the rules that interpret those provisions). Passive income items such as interest, rental income, dividends, and the like, will not be included in the denominator nor will the proceeds or net gains or losses from the sale of aircraft be included. The numerator of the revenue factor is the total revenue of the taxpayer in Missouri during the income year. The total revenue of the taxpayer in Missouri during the income year is the result of the following calculation: the ratio of departure of aircraft in Missouri weighted as to the cost and value of aircraft by type, as compared to total departures similarly weighted multiplied by the total transportation revenue. The product of this calculation is to be added to any nonflight revenues directly attributable to Missouri.

1. (3) Records. The taxpayer must maintain the records necessary to arrive at departures by type of aircraft as used in these rules. These records are to be subject to review by the respective state taxing authorities or their agents. Examples of the Manner in Which the Multistate Tax Commission Airline Regulation Would Apply to Specific Fact Situations

EXAMPLE #1: Assume the following facts for an airline for a tax year:

1. 1. It has ten 747s ready for flight and in revenue service at an average cost per unit of $40,000,000 for nine of the aircraft. It rents the tenth 747 from another airline for $9,000,000 per year. At eight times rents, the latter is valued at $72,000,000 for apportionment purposes. The total 747 valuation is, therefore, $432,000,000 for property factor denominator purposes.
2. 2. It has twenty 727s ready for flight in revenue service at an average cost per unit of $20,000,000. The total 727 valuation is, therefore, $400,000,000 for property factor denominator purposes.
3. 3. It has nonflight tangible property (ntp) valued at original cost of $200,000,000.
4. 4. It has the following annual payroll: Flight personnel Nonflight personnel (np) Total
5. 5. From its operations, it has total receipts of $50,000,000, business net income of $1,000,000 and no nonbusiness income.
6. 6. It has the following within State X:
7. a. 10% of its 747 flight departures:
8. b. 20% of its 727 flight departures:
9. c. 5% of its ntp:
10. d. 15% of its np payroll:
11. 7. State X has a corporation tax rate of 10%.

The airline’s tax liability to State X would be determined as follows:

Property Factor:

$ 43,200,000 (747s) + $ 80,000,000 (727s) + $ 10,000,000 (ntp) $133,200,000 $432,000,000 + $400,000,000 + $200,000,000

Sales Factor:

$43,200,000 (747s) + $80,000,000 (727s) $123,200,000 = $432,000,000 + $400,000,000 $832,000,000 Payroll Factor:

$6,000,000 (nonflight) + $8,880,000 (.148 × $60,000,000) (flight) $100,000,000 $100,000,000

Average Ratio: .1291 + .1481 + .1488 .4260 = = .1420 3 3

Taxable Income in State X: .1420 × $1,000,000 = $142,000 Tax Liability to State X: .10 × $142,200 = $14,200 $ 60,000,000 $ 40,000,000 $100,000,000

= $1,032,000,000

.1481

$ 14,880,000 =

$43,200,000 $80,000,000 $10,000,000 $ 6,000,000

= .1291

= .1488

EXAMPLE #2: Same facts except that paragraphs 6. and 7. are changed to read:

1. 6. It has the following within State Y:

   1. a. 6% of its 747 flight departures ($25,920,000)
   2. b. 31% of its 727 flight departures ($124,000,000)
   3. c. 3% of its ntp ($6,000,000)
   4. d. 7% of its NP payroll ($2,800,000)
2. 7. State Y has a corporate tax rate of 6.5%.

The airline’s tax liability to State Y would be determined as follows:

$25,920,000 (747s) + $124,000,000 (727s) + $6,000,000 (ntp) $155,920,000 = = .1511 $432,000,000 + $400,000,000 + $200,000,000 $1,032,000,000

Sales Factor:

$25,920,000 (747s) + $124,000,000 (727s) $149,920,000 = = .1802 $432,000,000 + $400,000,000 $832,000,000

Payroll Factor:

$2,800,000 (nonflight) + $10,812,000 (flight) (that is, 1802 × $60,000,000) $13,612,000 = = .1361 $40,000,000 + $60,000,000 $100,000,000

Average Ratio:

.1511 + .1802 + .1361 .4674 = = .1558 3 3

Taxable Income in State Y: .1558 × $1,000,000 = $155,800

Tax Liability to State Y: .065 × $155,800 = $10,127 AUTHORITY: sections 32.200 (Article VII) and 143.961, RSMo 1994.* Original rule filed Jan. 18, 1989, effective May 11, 1989. *Original authority: 32.200, RSMo 1967 and 143.961, RSMo 1972.