New Utah Sales Factor Weighted Taxpayer Apportionment Rule Begins with 2011 Tax Returns

A business that has nexus in Utah and in other states must divide its business income among the states through a process called apportionment.  Nexus means that the business has enough physical or economic attachment to a state to require the filing of income tax returns and the payment of tax.  Apportionment has traditionally used a three-factor formula to divide business income:  an average of (1) the percentage of property owned or rented in the state, (2) the percentage of employee wages paid in the state, and (3) the percentage of sales to customers in the state.

States have become much more aggressive in seeking business development from multistate businesses.  Many states have changed from the equal weighting of the traditional three-factor formula to over-weighting the sales factor, or even adopting a single sales factor.  Increasing the sales factor portion of the apportionment percentage tends to favor businesses who use a large amount of property, plant, and equipment and/or who employ a lot of labor in the state in relation to the amount of sales to customers in the state.  Utah has made changes to its sales factor in response to the evolving apportionment landscape.

For tax years beginning after 2010, every multistate taxpayer must determine if they are a "Sales Factor Weighted Taxpayer (SFWT)."  A SFWT is a taxpayer having greater than 50 percent of total sales (everywhere, not just in Utah) generated by economic activities classified in the 2002 or 2007 North American Industry Classification System (NAICS) code from activities other than:

1. Section 21, Mining;
2. Sections 31-33, Manufacturing;
3. Sections 48-49, Transportation and Warehousing;
4. Section 51, Information (except for Subsector 519, Other Information Services); or
5. Section 52, Finance and Insurance.

A taxpayer who is a partner in a partnership must include their pro-rata share of the partnership's sales in determining whether it meets the 50 percent of total sales everywhere requirement.  The NAICS can be found at http://www.naics.com/.

Utah is increasing the sales factor weighting over a period of years for SFWTs.  For tax years beginning in 2011, the sales factor receives a four times weighting in the traditional three-factor formula.  For tax years beginning in 2012, the sales factor receives a 10 times weighting.  For tax years beginning in 2013 and later, the apportionment formula for SFWTs will change from three-factors to a single-sales factor apportionment formula.  Multistate taxpayers that are not SFWTs continue using the traditional, equal-weighted three-factor formula, or they may make an election to double weight the sales factor in the traditional apportionment calculation.