I-507 Specialized Industry Formulas Background The evenly weighted three-factor (property, payroll, and sales) apportionment formula included in the Uniform Division of Income for Tax Purposes Act (UDITPA) was designed to apportion the net income of multistate manufacturing and mercantile businesses. Accordingly, the application of that standard formula to multistate service-oriented or specialized industry businesses has posed a problem for taxpayers and the states because income allocated under the formula may not fairly represent such taxpayers’ in-state business activities. In particular, many have questioned the utility of the “cost of perfor- mance” rule found in UDITPA Section 17 for sourcing the in-state receipts of service- oriented businesses. Under UDITPA Section 17, sales of services are assigned to the state in which the greatest proportion of the income-producing activity is performed, based on cost of performance. In response, an increasing number of states have enacted statutes or issued regulations providing industry-specific or specialized methods of apportionment. In many instances, the equitable apportionment provisions of UDITPA Section 18, which most states have incorporated into their own statutes, have served as the legal basis for state revenue departments to adopt specialized apportionment methods through regulation. Specialized Apportionment Formulas The Multistate Tax Commission (MTC) has adopted special apportionment regulations covering construction contractors [MTC Reg. IV.18(d)], airlines [MTC Reg. IV.18(e)], railoads [MTC Reg. IV.18(f)], trucking companies [MTC Reg. IV.18(g)], television and radio broad- casting [MTC Reg. IV.18(h)], financial institutions [MTC Reg. IV.18(i)], and publishing [MTC Reg. IV.18(j)]. In general, these special industry regulations modify the rules for including and sourcing (i.e., including in the numerator of the factor) property, payroll, and sales under the standard three-factor apportionment formula. The most significant modifications are that in certain instances, the cost of performance rule is not used to source receipts, and intangible property is included in the property factor. For example, the publishing regula- tion calls for the use of a publication’s circulation factor; the broadcasting regulation requires the use of a program’s audience factor to allocate receipts in certain instances; and the financial institution apportionment regulation includes loans and credit card receiv- ables in the property factor. Many states, by statute or regulation, have adopted some or all of the MTC regulations or have used them as a basis for developing their own statutes or regulations. Some states
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I-507
Specialized Industry Formulas
Background
The evenly weighted three-factor (property, payroll, and sales) apportionment formulaincluded in the Uniform Division of Income for Tax Purposes Act (UDITPA) was designedto apportion the net income of multistate manufacturing and mercantile businesses.Accordingly, the application of that standard formula to multistate service-oriented orspecialized industry businesses has posed a problem for taxpayers and the states becauseincome allocated under the formula may not fairly represent such taxpayers’ in-statebusiness activities. In particular, many have questioned the utility of the “cost of perfor-mance” rule found in UDITPA Section 17 for sourcing the in-state receipts of service-oriented businesses. Under UDITPA Section 17, sales of services are assigned to the statein which the greatest proportion of the income-producing activity is performed, based oncost of performance.
In response, an increasing number of states have enacted statutes or issued regulationsproviding industry-specific or specialized methods of apportionment. In many instances,the equitable apportionment provisions of UDITPA Section 18, which most states haveincorporated into their own statutes, have served as the legal basis for state revenuedepartments to adopt specialized apportionment methods through regulation.
Specialized Apportionment Formulas
The Multistate Tax Commission (MTC) has adopted special apportionment regulationscovering construction contractors [MTC Reg. IV.18(d)], airlines [MTC Reg. IV.18(e)], railoads[MTC Reg. IV.18(f)], trucking companies [MTC Reg. IV.18(g)], television and radio broad-casting [MTC Reg. IV.18(h)], financial institutions [MTC Reg. IV.18(i)], and publishing [MTCReg. IV.18(j)]. In general, these special industry regulations modify the rules for includingand sourcing (i.e., including in the numerator of the factor) property, payroll, and salesunder the standard three-factor apportionment formula. The most significant modificationsare that in certain instances, the cost of performance rule is not used to source receipts, andintangible property is included in the property factor. For example, the publishing regula-tion calls for the use of a publication’s circulation factor; the broadcasting regulationrequires the use of a program’s audience factor to allocate receipts in certain instances; andthe financial institution apportionment regulation includes loans and credit card receiv-ables in the property factor.
Many states, by statute or regulation, have adopted some or all of the MTC regulationsor have used them as a basis for developing their own statutes or regulations. Some states
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have gone further than the MTC and have adopted specialized apportionment statutes orregulations for additional industries, including courier and package delivery services,telecommunications companies, pipeline companies, shippers, franchisers, film producers,securities brokers, professional sports teams, insurance companies, mutual funds, and thefishing industry. In some instances, the primary or secondary motive for a state’s adoptionof specialized apportionment rules is to foster certain industries present within its borders.
As a general rule, states permit only the corporations engaging in a business to which aspecial apportionment formula applies to use that formula or a valuation method containedin that formula. [See, e.g., Cooper Tire & Rubber Co. v. Limbach, 70 Ohio St. 3d 347 (1994);TTX Co. v. Whitley, No. 92 L 51075 (Ill. Cir. Ct. Aug. 31, 1998).] In most instances, whena corporation is required to use a specialized apportionment formula, all the entity’s incomewould be apportioned under that method. For example, in Texaco-Cities Service PipelineCompany v. McGaw [182 Ill. 2d 269 (1998)], the Illinois Supreme Court ruled that thetaxpayer’s gain from the sale of its 90 percent interest in a pipeline was apportionable underIllinois’s sales-only apportionment formula for transportation services businesses.
When a corporation engages in two businesses, one of which is required to use a specialapportionment formula, some states require or permit the use of two apportionmentformulas. For example, in Buckeye Pipeline Co. v. Commonwealth [689 A.2d 366 (Pa.Commw. Ct. 1997)], a one percent general partner of four limited partnerships engaged inthe interstate transportation of petroleum products through pipelines was permitted to usethe single- factor revenue barrel mile apportionment formula for pipeline companies toapportion the portion of its gross receipts attributable to its distributive share of partnershipreceipts, but also was required to use the standard three-factor formula to apportion grossreceipts attributable to management fees received from the partnerships.
Interstate Air Carriers
The MTC has adopted a regulation that addresses the apportionment of business incomeby multistate airlines. [MTC Reg. IV.18(e)] The regulation modifies the standard three-factorproperty, payroll, and sales formula used to apportion business income.
Property Factor. In general, the property factor denominator includes all owned andleased real and tangible personal property used in the company’s business. The numeratorincludes all owned and leased real and tangible personal property used in a particular stateduring the income year. The regulation provides a special rule, however, for sourcingaircraft ready for flight. Such aircraft are includible in a particular state’s numerator in theratio of departures of aircraft from locations in that state weighted as to the cost and valueof aircraft by type compared to total departures similarly weighted. Aircraft ready for flightare defined as aircraft owned or acquired through rental or lease (but not interchange) thatare in the possession of the taxpayer and are available for service on the taxpayer’s routes.
Payroll Factor. The denominator of the payroll factor includes all compensation paideverywhere by a taxpayer during the income year. The numerator of the payroll factor isthe total compensation paid in a particular state during the income year, except forpersonnel performing services within and without the state. The regulation provides aspecial rule for the computation of the payroll factor numerator with respect to flightpersonnel. The payroll of such employees is includible in a particular state’s payroll factornumerator in the ratio of departures of aircraft from in-state locations weighted as to thecost and value of aircraft by type compared to total departures similarly weighted, multi-plied by the total flight personnel compensation.
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Sales Factor. In general, the sales factor denominator includes all revenue derived fromtransactions and activities in the regular course of an airline’s trade or business, except forpassive income and net gains or losses from the sale of aircraft. The numerator of the salesfactor is the total in-state revenue of the taxpayer during the income year. Total in-staterevenue consists of 1) the ratio of in-state departures of aircraft weighted as to the cost andvalue of aircraft by type compared to total departures similarly weighted, multiplied by thetotal transportation revenue, and 2) any directly attributed nonflight revenues.
The States. A number of states have formally adopted the MTC regulation; other stateshave adopted variations of the regulation or their own rules for apportioning air carrierincome. Some states require air carriers to use a three-factor aircraft arrivals and departures,revenue tons handled, and originating revenue formula to apportion income. Some statesrequire an air carrier to use a single-factor formula based on revenue miles or revenue tonmiles to apportion income.
Courts in Illinois and Virginia have held that air carriers were not required to includeflyover miles in computing their states’ apportionment percentages. In Northwest Airlines,Inc. v. Department of Revenue [No. 1-96-4267 (Ill. App. Ct. Mar. 20, 1998)], the IllinoisAppellate Court held that Northwest Airlines and Republic Airlines were not required toinclude flyover miles in the numerator of their single-factor apportionment formula. Illinoisrequires airlines to use a single-factor apportionment formula, the numerator of which isthe revenue miles of the person in Illinois, and the denominator of which is the revenuemiles of the person everywhere. In reaching its decision, the court held that the state lackedsufficient nexus to tax the flyover miles.
Similarly, in Delta Air Lines, Inc. v. W.H. Forst [No. 93-1238 (Va. Cir. Ct. Jan. 27, 1998)],the court held that overflight miles were improperly included in Delta Airline’s Virginiaapportionment formula. Delta used a three-factor property, payroll, and sales formula toapportion its income. In computing its property factor, Delta applied a mileage formula forpurposes of sourcing aircraft. Delta included “actual arrival and actual departure” miles inthe numerator because only those miles related to the airline’s use of Virginia facilities andservices. Delta excluded overflight miles from the numerator of the mileage formula. Incomputing its sales factor, Delta also used a mileage formula for sourcing passenger andcargo revenue. In addition, Delta excluded overflight miles from the numerator of its mileageformula. In reaching its holding, the court examined the relevant statutory provisions. Thecourt found that for property to be included in the property factor numerator, the statuterequired that property to be used in Virginia. Likewise, the sales factor numerator couldonly include sales in Virginia. The court concluded that property used in Virginia and salesin Virginia were not equivalent to property used over Virginia and sales attributable toactivities occurring over Virginia. In addition, the court held for Delta on its constitutionaland federal preemption arguments.
Interstate Trucking Companies
The MTC has adopted a regulation that addresses the apportionment of business incomeby multistate trucking companies. [MTC Reg. IV.18(g)] The regulation modifies the standardthree-factor property, payroll, and sales formula used to apportion business income.
Property Factors. In general, the property factor denominator includes all owned andleased real and tangible personal property used in a trucking company’s business. Thenumerator includes all owned and leased real and tangible personal property used in aparticular state during the income year. The regulation provides a special rule, however,
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for sourcing mobile property. That is, mobile property located solely within a particularstate is includible in that state’s property factor numerator, but mobile property locatedwithin and without a particular state during the income year is included in the numeratorin the ratio that mobile property miles in the state bear to total mobile property miles.A mobile property mile is defined as the movement of a unit of mobile property a distanceof one mile whether loaded or unloaded.
Payroll Factor. The denominator of the payroll factor includes all compensation paideverywhere by a taxpayer during the income year. The numerator of the payroll factor isthe total compensation paid in a particular state during the income year, except forpersonnel performing services within and without the state. The regulation provides aspecial rule with respect to the computation of the payroll factor numerator when personnelperform services within and without the state: the payroll of those employees is includiblein a particular state’s payroll factor numerator in the ratio that their services performed inthat state bear to their services performed everywhere based on mobile property miles.
Sales Factor. In general, the sales factor denominator includes all revenue derived fromtransactions and activities in the regular course of a trucking company’s trade or business.The numerator of the sales factor is the total in-state revenue of the taxpayer during the incomeyear; however, the regulation provides special rules for sourcing revenue from hauling freightand mail. A trucking company will be required to include in a particular state’s numeratorall receipts from any shipment that originates and terminates within that state. With respectto interstate shipments, the amount of revenue included in a particular state’s numerator willbe determined by the ratio that the mobile property miles traveled by such movements orshipments in that state bear to total mobile property miles traveled by movements orshipments from points of origin to destination.
The States. A number of states have formally adopted the MTC regulation; other stateshave adopted variations of the regulation or their own rules for apportioning air carrierincome. Many states require a trucking company to use a single-factor formula based oneither mileage or revenue miles to apportion income.
Telecommunications Service Providers
Most states require telecommunications service providers to use their standard appor-tionment formulas. Some states have adopted regulations that modify their standardproperty, payroll, and sales apportionment formula rules for telecommunications compa-nies. For example, in computing its sales factor numerator, Kentucky requires a telephoneand telegraph company to include gross receipts from sales or services billed to in-statecustomers, access fees from long distance carrier services rendered by the local companyin Kentucky, and gross receipts from other sources as determined under the regular sourcingrules. In computing its property factor, a telephone and telegraph company is required toexclude from the numerator and denominator property owned or leased in outer space.
Some states permit or require telecommunications companies to use a single-factorapportionment formula. For example, Kansas permits qualifying telecommunications com-panies to elect to use a single-factor apportionment formula, the numerator of which is theinformation-carrying capacity of wire and fiber optic cable available for use in Kansas andthe denominator of which is the information- carrying capacity of wire and fiber optic cableavailable for use everywhere. Mississippi requires public service utilities (which includetelephone and telegraph companies) to use a single-factor apportionment formula based ongross operating revenue.
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Effective March 20, 2005, for Louisiana corporate income tax purposes, gross apportion-able income attributable to Louisiana from providing telephone, telecommunications, andsimilar services includes: 1) revenue derived from charges for providing telephone accessfrom a Louisiana location 2) revenue derived from charges for unlimited calling privilegesif the charges are billed by reference to a service address located in the state; 3) revenuefrom intrastate telephone calls or other telecommunications, except for mobile telecommu-nication services, beginning and ending in Louisiana; and 4) revenue from interstate orinternational telephone calls or other telecommunications, except for mobile telecommu-nication services, either beginning or ending in Louisiana if the service address charged forthe call or telecommunication is located in Louisiana, regardless of where the charges arebilled or paid. Revenue from mobile telecommunications services is attributed to the placeof primary use, which is the residential or primary business street address of the customer[La. Dept. of Rev., Regs. §§ 306 and 1134].
Sports/Entertainment Activities
Some states have adopted special apportionment rules for professional sports teams. Forexample, under California’s statutory scheme for apportioning the income of professionalsports teams, only teams with their operations based in California are subject to tax. All ofa California-based team’s property, payroll, and sales will be sourced to California. Anexception to the rule applies if a California-based team is required to allocate or apportionits business income to another state or country and pay an income tax or franchise taxmeasured by income to the other state or country. In such an instance, the California-basedteam is permitted to reduce its business income subject to California tax by the amount ofallocated and apportioned business income taxed by the other state or country. In addition,any team in the same league that has its operations based in the other state or country issubject to California tax on business income allocated and apportioned to California in amanner consistent with the method of allocation and apportionment imposed by the otherstate or country.
Wisconsin taxes professional sports teams doing business in Wisconsin. Wisconsin’sregulation provides for modifications to the property, payroll, and sales factors. In comput-ing the property factor, Wisconsin excludes minor equipment, including uniforms andplaying and practice equipment. In computing the payroll factor, Wisconsin requiresbonuses and payments to be included on a prorated basis in accordance with federal incometax law. With respect to the computation of the sales factor, a team whose home facility isin Wisconsin is required to include in its numerator all gate receipts from games played atits home facility. A taxpayer whose home facility is outside of Wisconsin is required toinclude the percentage of gate receipts received from games played in Wisconsin. TheWisconsin regulation also provides for the sourcing of radio and television receipts fromnational and local broadcasting contracts, concessions, and miscellaneous income. Radioand television receipts from league or association contracts with major communicationsnetworks are includible in the sales factor numerator in proportion to the number of gamesplayed in Wisconsin to total games played by the taxpayer covered by the contract duringthe season. Local television and radio receipts are sourced in Wisconsin if the games areplayed in Wisconsin. A taxpayer is required to include concession income and othermiscellaneous income (e.g., parking lot income, advertising income) in the sales factornumerator if the activity giving rise to the income occurs in Wisconsin. Income from playercontract transactions, franchise fees, and similar sources is excluded from both the salesfactor numerator and denominator.
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Financial Institutions
The MTC regulation governing the apportionment of income for financial institutionsrepresents a compromise between the money-center states, the market states, and represen-tatives from several of the largest financial institutions. [MTC Reg. IV.18(i)] Accordingly,the adopted regulation includes a combination of money-center and market-state ap-proaches and several simplified sourcing rules. Although the regulation does not containa definition of financial institution, a definition is included as a suggested regulation in anappendix to the proposed regulation.
The apportionment formula for financial institutions is the standard three-factor formulaconsisting of equally weighted sales, payroll, and property factors. The sales factor isprimarily market-state focused, although it includes both market-state and money-centerapproaches. The payroll factor is similar to the general rules found in UDITPA and the MTCregulations. In addition to including all real and tangible personal property owned or leasedby the financial institution, the property factor includes two intangible assets: loans andcredit card receivables. The property factor does not, however, include currency, deposits,or foreclosed property. The receipts factor is primarily market-state or destination driven.The denominator of the receipts factor includes 1) receipts from the lease of real property,2) receipts from the lease of tangible personal property, 3) interest from loans secured byreal property, 4) interest from loans not secured by real property, 5) net gains from the saleof loans, 6) receipts from credit card receivables, 7) net gains from the sale of credit cardreceivables, 8) credit card issuers’ reimbursement fees, 9) receipts from merchant discounts,10) loan servicing fees, 11) receipts from services, 12) receipts from investment assets andactivities and trading assets and activities, and 13) all other receipts.
In 1994, the MTC adopted a model statute for apportioning the income of a financialinstitution [see Recommended Formula for the Apportionment and Allocation Of NetIncome of Financial Institutions (Nov. 17, 1994)].
Insurance Companies
Most states do not subject insurance companies to a corporate income tax. Many statesthat impose an income tax on insurance companies require those companies to use a single-factor premiums written formula to apportion income. The composition of the formula mayvary from state to state. For example, Connecticut provides that the numerator of the formulaconsists of a domestic insurance company’s gross direct premiums for insurance onproperty or risks located or resident in the state and the denominator consists of total grossdirect premiums received during the income year from all sources. When more than50 percent of the gross premiums received during the income year are reinsurance premi-ums, the fraction includes reinsurance premiums.
Some states require certain domestic insurance companies to use a two-factor premiumsand payroll apportionment formula. There are also a handful of states that have no specialapportionment rules for insurance companies.
Mutual Funds
Most states have not enacted or adopted special apportionment formulas for mutualfunds. An exception is Minnesota, which requires investment companies to use a single-factor apportionment formula whose numerator consists of the aggregate of the grosspayments collected during the taxable year from old and new business on investmentcontracts issued by the company and held by Minnesota residents and whose denominator
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consists of the total amount of the gross payments collected during the year from oldand new investment contracts issued by the company and held by persons residingeverywhere.
Some states have enacted special apportionment formulas for investment companyservice corporations. For example, Connecticut permits corporations that provide manage-ment, distribution, or administrative services (management services) to or on behalf of aregulated investment company to elect to apportion their net income directly or indirectlyrelated to the providing of those services using a single-factor apportionment formula. Thenumerator of the fraction consists of Connecticut receipts, and the denominator consists ofthe total receipts from the sale of management services to or on behalf of all the regulatedinvestment companies. Connecticut receipts are determined by multiplying receipts fromthe rendering of management services to or on behalf of each separate regulated investmentcompany by a fraction, the numerator of which is the average number of shares of suchregulated investment company owned by shareholders domiciled in Connecticut at thebeginning and end of the entity’s tax year and the denominator of which is the averagenumber of shares owned by all shareholders of the regulated investment company duringthat period. The statutory apportionment provisions in Massachusetts and Rhode Islandare similar to Connecticut’s rules.
Under legislation enacted by Kansas in 2002, investment fund service corporations thatemploy at least 100 full-time workers in Kansas may elect to apportion income to Kansasbased on the ratio of the mutual fund shares of the taxpayer’s clients that are owned byKansas residents to shares owned by shareholders everywhere. [Kan. S.B. 39 (May 30, 2002)]
Service Providers
In general, a service provider is defined as a corporation whose net income is not derivedprimarily from the manufacture, sale, or use of tangible personal or real property. The statesare split on whether to examine only a corporation’s in-state activities for purposes ofclassifying that entity as a service provider. Some states examine both a corporation’s in-state and out-of-state business activities to ascertain whether that company is a serviceprovider. Other states have indicated that they will make the determination based only onthe corporation’s in-state activities.
Virtually all of the states require service providers that are not covered under otherspecialized industry apportionment formulas (e.g., transportation companies) to use theirstate’s standard apportionment formula. Some states, however, require service providersthat are not covered under specialized industry apportionment formulas to use a single-factor gross receipts apportionment formula.
For purposes of sourcing gross receipts from the sale of services, most states continue toapply the “greater cost of performance” rule. Georgia, Iowa, Maryland, Minnesota, and Ohio,however, require the inclusion of gross receipts in the sales factor if the receipts are derivedfrom customers within the state or are otherwise attributable to the state’s marketplace.
Manufacturers, Retailers, and Lessors
Almost all states require manufacturers, retailers, and lessors of real and personalproperty to use their state’s standard apportionment formula. There are a few exceptionsto that general rule. Mississippi requires wholesalers, retailers, and lessors that do notengage in manufacturing to use a single-factor gross receipts formula. A manufacturer-retailer is required to use a three-factor property, payroll, and double-weighted sales factor
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apportionment formula; a manufacturer-wholesaler is required to use a three-factor prop-erty, payroll, and sales apportionment formula. Maryland requires a leasing company touse a two-factor receipts and property formula. If certain statutory conditions are met,Oklahoma permits a manufacturing enterprise whose only in-state activities consist ofmarketing its products to use a sales-only formula to apportion income. Minnesota permitstelephone sales or mail- order companies that have at least 99 percent of their property andpayroll within the state to use a sales-only formula to apportion income.
Some states have enacted special apportionment rules that generally benefit in-statemanufacturers. For example, as a result of legislation enacted in 2000, beginning in 2001manufacturers may use a sales-only formula in Connecticut and Massachusetts. In addition,in response to legislation enacted in 2001 (H.B. 11), the Maryland Comptroller of theTreasury adopted a rule that requires manufacturing corporations to use a sales-onlyformula. [Md. Regs. § 03.04.03.10 (Feb. 22, 2002)] Likewise, Florida permits a citrusprocessing company to apportion its income based solely on the sales factor. [Fla. Stat. Ann.§ 220.151(3)]
Television and Radio Broadcasters
In 1990, the MTC adopted a regulation dealing with the apportionment of businessincome by multistate taxpayers in the television and radio broadcasting industry. [MTCReg. IV.18(h)] The regulation modifies the standard three-factor property, payroll, and salesformula used to apportion business income. In April 1996, the MTC adopted amendmentsto the regulation in order to gain broader acceptance among the states.
The amended regulation covers a broadcaster over the public airwaves, by cable (director indirect), by satellite transmission, or by any other means of communication that istaxable in at least two states.
Property Factor. In general, the property factor denominator includes all owned andleased real and tangible personal property used in the broadcaster’s business. In the caseof rented studios, the net annual rental rate generally includes only the amount of a studio’sbasic or flat rental charge for the use of a stage or other permanent equipment. In addition,the denominator includes (at original cost) audiocassettes or videocassettes, discs, or othersimilar media containing film or radio programming that the taxpayer intends to sell forhome viewing or listening. A broadcaster is required to capitalize, at a rate of eight timesgross receipts, any license, royalty, or other fees that it receives from the licensing ofcassettes, discs, or other media for home viewing or listening. The property factor numeratorincludes all real and tangible personal property located or used in a particular state duringthe tax period. Property used in more than one state is allocated to a particular state on thebasis of number of days located or used within that state compared to the total number ofdays such property was owned or rented during the tax year. Outer-jurisdictional property(e.g., orbiting satellites, undersea transmission cables) and the value or cost attributable toany film or radio programming are excluded from both the numerator and denominator ofthe property factor.
Payroll Factor. The denominator of the payroll factor comprises all compensation,including residual and profit participation payments, paid to employees during the taxperiod; that includes compensation paid to directors, actors, newscasters, and other talentin their status as employees. Previously, the denominator could include amounts paid tothird parties for providing the services of directors, actors, newscasters, and other talent forlive programming if the payments constituted at least 25 percent of the total compensation
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paid to employees and the failure to include those amounts would not result in a properreflection of the taxpayer’s in-state activities. The payroll factor numerator comprisescompensation paid to employees as determined under the standard sourcing rules. Previ-ously, the numerator also included payments made to third parties.
Sales Factor. In general, the sales factor denominator includes all gross receipts (i.e.,domestic and foreign based) that a broadcaster derives in its trade or business. In determin-ing the sales factor numerator, an audience factor is used to ascertain the portion of abroadcaster’s in-state gross receipts—including advertising revenue—from live program-ming. A television or radio station’s in-state audience factor is the ratio of the broadcaster’sin-state viewing or listening audience to its total viewing or listening audience. A cabletelevision system’s in-state audience factor is the ratio of the system’s in-state subscribersto its total subscribers. Under the original MTC regulation, gross receipts derived frombroadcasts to audiences located outside the United States were excluded from the base towhich the audience factor was applied. In addition, the audience factor denominatorincluded only the U.S. viewing or listening audience and the U.S. total cable subscribers.Receipts from the sale, rental, or licensing of audiocassettes or videocassettes, discs, orsimilar media intended for home viewing or listening are sourced under the standardapportionment rules.
The States. Some states have conformed to the MTC broadcasting regulations. Forexample, in 2004, the Montana Department of Revenue adopted the MTC rules andguidelines for apportioning the income of companies in the business of broadcasting filmor radio programming, as well as companies in the business of publishing, selling, licensingor distributing printed material [Mont. Reg. 42.26. 1001 to 1103, Apr. 23, 2004]. Nonethe-less, a number of states have adopted their own rules that use an audience factor as a basisfor apportioning certain types of income. A majority of states have not adopted specializedapportionment rules for broadcasters. In at least one state—Maryland—a court has held thata revenue department’s attempt to use an audience factor to source advertising revenueconstituted improper rulemaking. [CBS, Inc. v. Comptroller of the Treasury, 319 Md. 687(1990)] Maryland treats broadcasters as service providers. In 2002, Louisiana enactedlegislation providing that broadcast revenue be apportioned using an audience factor. [La.H.B. 141 (June 25, 2002)]
Other Specialized Industries. Modifications to the general three-factor formula forspecialized industries can range from minor to monumental. For example, some statesrequire construction contractors to modify the property factor to account for constructionin progress, regardless of the accounting method used. In determining apportionment forthe railroad industry, the MTC regulations have modified the property factor for movableproperty (based on railroad car miles). The sales factor is also adjusted for freight andpassenger miles. Some states have enacted similar statutes for trucking companies. Forinterstate carriers, the usual three factors have been modified for mobile property, payrollof personnel moving interstate, and sales of personal property hauled interstate. Themodified formula generally uses a ratio of mobile property miles in the three factors.
MTC Regulation IV.18(j) governs the apportionment of business income derived frompublishing, selling, licensing, or distributing printed materials. The publishing regulationprovides for the use of the standard three-factor formula consisting of evenly weighted sales,payroll, and property factors. Under the regulation, publishing revenues and advertisingreceipts are included in the numerator of the sales factor based on a circulation factor. Thecirculation factor, which must be determined for each publication or printed material thatincludes advertising, generally is equal to the ratio that the taxpayer’s in-state circulation
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to purchasers and subscribers of printed material bears to its total circulation to purchasersand subscribers as determined by reference to rating statistics. Like the sales factor in otherMTC regulations, the sales factor in the publishing regulation includes a throwbackprovision. The publishing regulation’s payroll factor is similar to the general rules foundin UDITPA and the other MTC regulations. In addition to including all owned and rentedreal and tangible personal property, the property factor includes orbiting satellites andundersea transmission cables that are used in the business. The cost of outer-jurisdictionalproperty to be included in the numerator of the property factor for a given state generallyis determined by the number of uplinks and downlinks that were used to transmitinformation from and receive information in that state.
A taxpayer generally is permitted to petition for, or a tax administrator is allowed torequire, alternative apportionment methods if the normal apportionment and allocationprovisions do not fairly represent the extent of the taxpayer’s business activity in the state.Relief under such a provision generally is accomplished by excluding one or more factors,including one or more additional factors, or modifying the methodology of the existingfactors.
State-by-State Summary
The chart that follows is divided into three parts for ease of presentation. Part 1summarizes the apportionment formulas for airlines, trucking companies, telecommunica-tions companies, and sports and entertainment companies. Part 2 covers financial institu-tions, insurance companies, and mutual funds. Part 3 summarizes the apportionmentformulas for service companies, retailers, and broadcasters.
