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Focus on Transportation & Dealerships: State Income Tax Apportionment of Interstate Trucking Businesses

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The Uniform Division of Income for Tax Purposes Act (UDITPA) equally weighted three-factor property, payroll and sales apportionment formula was designed to apportion the income of multistate manufacturing and mercantile businesses, and may not fairly apportion the income of businesses in other industries, including interstate trucking companies.
October 28, 2013
The Uniform Division of Income for Tax Purposes Act (UDITPA) equally weighted three-factor property, payroll and sales apportionment formula was designed to apportion the income of multistate manufacturing and mercantile businesses, and may not fairly apportion the income of businesses in other industries, including interstate trucking companies. For example, the conventional UDITPA property factor is difficult to calculate for property that regularly crosses state borders, as is the case with interstate trucking companies. Likewise, the UDITPA cost of performance rule for sourcing sales of services has been controversial. Many commentators have argued that its effect is often to merely mimic the property and payroll factor, rather than measure the customer base within a state. The drafters of UDITPA foresaw the limitations of the standard UDITPA apportionment formula and specifically excluded from UDITPA certain service businesses, including interstate trucking companies.

The Multistate Tax Commission (MTC) has also promulgated special apportionment regulations covering trucking companies. Typically, the rules for apportionment of trucking companies involve the modification or exclusion of the conventional three factors, or the use of unique, industry-specific factors, primarily by basing the computation of the factor numerators on the ratio of the mobile property miles in the state to the mobile property miles everywhere. Some states have adopted the MTC model approach, in whole or in part. Other states have adopted their own special formulas, such as single-factor formulas based on revenue miles, or miles operated or traveled.

Under the MTC regulation, a "trucking company" is defined as 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.

Property Factor

In general, the denominator of the property factor includes the average value of all owned and rented real and tangible personal property used by the trucking company in its trade or business. The numerator includes all owned and rented property used in the state. The MTC regulation provides a special rule for sourcing mobile property (i.e., motor vehicles and trailers), which is included in the state's numerator based on the ratio of mobile property miles in the state to total mobile property miles. A mobile property mile is defined as the movement of a unit of mobile property a distance of one mile, whether loaded or unloaded.

Payroll Factor

The denominator of the payroll factor includes all compensation paid everywhere by a trucking company, and the numerator is the total compensation paid in a particular state. The MTC regulation provides a special rule for sourcing compensation paid to employees performing services within and without the state. The payroll of such employees is includible in the state's payroll factor numerator based on the ratio of mobile property miles in the state to total mobile property miles.

Sales Factor

Under the MTC regulation, the denominator of the sales factor includes all revenue derived from transactions and activities in the regular course of the trucking company's trade or business, and the numerator is the trucking company's total revenues in the state. The taxpayer in-state revenues from hauling freight, mail and express include the entire amount of the receipts from intrastate shipments (i.e., the shipment both originates and terminates within the state). In-state revenues also include a pro rata portion of the receipts from interstate shipments (i.e., shipments passing through, into, or out of the state), determined by the ratio of the mobile property miles traveled by the shipment in the state to the total mobile property miles traveled by the shipment from its point of origin to its destination. The in-state portion of any revenues, other than revenue from hauling freight, mail and express, is determined under the standard UDITPA rules for sourcing sales.

Those in the interstate trucking business need to be aware of the special apportionment rules for their business and differences existing state-to-state in their application. RubinBrown’s Transportation & Dealerships Services Group has many years of experience working with interstate trucking businesses.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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