REQUEST LETTER
01-013
Response 11/27/01
NAME
COMPANY
ADDRESS
I am writing on
behalf of my client to request guidance, regarding the potential requirement to
file corporate income and/or franchise tax returns in your state. My client is primarily involved in the
business of mortgage banking. Although
this firm currently services loans in your state and may eventually hold a
security interest in real property if foreclosure occurs, they have no offices
or employees located in your state. The
firm is, however, registered to do business in your state, and obviously wishes
to have rights in the courts of the state with respect to foreclosure.
As stated above,
our client’s primary business activity is that of a “mortgage banker”. The 5th Edition of black’s Law
Dictionary defines mortgage banker, as:
[a] person or firm engaged in the business
of dealing in mortgages including their placement and refinancing. Normally such banker uses its own funds as
opposed to a commercial or savings and loan bank, which, which uses primarily
funds of depositors. While some
mortgage bankers do provide long-term (permanent) financing, the majority
specializes in short-term and interim financing. Mortgage bankers, or mortgage companies, are in the business or
originating mortgage loans to sell.
Attendant to the mortgage loan origination and resale functions,
mortgage bankers may service loans, write hazard insurance, broker loans or
property, manage property, act as leasing agents, or act as appraisers.
As background, some
states, like STATE, would classify our client, based on its activities, e.g., a
company engaged in the business of soliciting loans secured by first deeds with
the intention of assigning them to institutional investors is considered to be
dealing in moneyed capital in competition with national banks and, therefore,
for STATE franchise/income tax purposes is treated as a financial
corporation. Other states, like STATE,
look to the specific categories of entities listed in the statutory definition
of “financial organization” in the STATE Income Tax Act. Mortgage banking corporations do not qualify
as financial organizations for STATE income tax purposes.
Our client’s more
specific facts are, as follows:
-
Our client is a mortgage banker, organized as a Limited Liability
Company (LLC), taxed as a partnership, with its headquarters in STATE, which
began operations in your state in the year ####.
-
Our client is registered to do business in each of the states in which it
originates loans; from its STATE office it solicits loan originations in
STATE, STATE, STATE, STATE, STATE, STATE and STATE.
-
Our client is planning to open a new loan origination office in
STATE in MONTH of YEAR. Up until that date all STATE loan
originations were solicited and processed in STATE.
-
Our client has an STATE office that solicits and originates loans
in STATE, STATE, and Utah.
-
The personnel in the STATE office also work with two wholesale loan originators, who work
out of home offices in STATE, on wholesale loan originator in STATE and one
wholesale loan originator in Utah, who also both work out of a home offices.
-
Loan originations are solicited through advertisements in national publications, by making
telephone calls to potential customers, by purchasing leads from telemarketing
companies, and through referrals from affinity relationships with various
banks, finance and insurance companies;
-
Our client does not currently advertise in local or so-called “national” yellow pages, but
is currently considering doing both types of advertising;
-
Loans that are originated by our client are funded on their behalf
by various title companies, which also prepare loan packages and perform the closings on behalf of our client.
-
Our client also purchases loans from other loan originators and
resells them.
We have six
questions we would like addressed, in order to clarify our client’s income
and/or franchise tax filing requirements in your state, as follows:
1)
Based on the above description of our client’s activities in your
state, do these activities create nexus for income and/or franchise tax
purposes in your state for either the LLC or its members? If so, please cite your statutory authority
and/or other basis for that
determination.
2)
If you determine that our client does not have nexus in our first
question, would the fact that they began to advertise in local or so-called
“national” yellow pages in your state be a nexus creating activity for income
and/or franchise tax
purposes? If so, please cite your
statutory authority and/or to other basis for that determination.
3)
Based on the above description of our client’s activities in your
state, would your state classify and treat the LLC as a regular LLC or would it be treated as a financial institution
or financial organization under your state’s law? Please cite the statutory authority and/or other basis for your
determination.
4)
Does your state require LLC’s or it’s members to file income
and/or franchise tax returns,
if the LLC does not have nexus in your state, but is registered to do business? If so, please cite your statutory authority
and/or other basis for that determination.
5)
If the LLC or its members are required to file income and/or
franchise tax returns in your
state, please provide guidance as to the specific filing requirements, e.g.,
which tax forms need to filed, for both the LLC and its members. If members are required to file income tax
returns, are composite returns permitted for individual members and are there
nonresident withholding requirements for individual members? Please cite the statutory authority and/or
other basis for your determinations.
6)
If the LLC or its members are required to file income and/or
franchise tax returns in your state, please provide guidance on the sourcing rules for
apportionment factor purposes of: how revenue from
loan origination fees, where loans are closed in your state on behalf of our
client by unrelated third-parties, is sourced for the sales or receipts factor; how interest income from loans on real
property located in your state are sourced for the sales or receipts factor;
and whether loans held by our client are included in the property factory and
how they sourced. Please cite the statutory authority and/or
other basis for your determinations.
Both COMPANY and our client are eager to receive your
responses to our inquiries, as we need the information in order to accurately
and timely file income and/or franchise tax returns with your state.
Please
acknowledge this inquiry with a response outlining your position on the
above-mentioned issues. If you have any
questions, need any additional information or it is necessary to know the name
of the taxpayer in order for them to rely on your response, please contact NAME at PHONE, so we can discuss questions and
otherwise how to proceed.
Sincerely,
NAME
RESPONSE LETTER
DATE
NAME
COMPANY
ADDRESS
RE: Advisory Opinion – Income Tax Nexus Ruling for Mortgage
Banker
Dear Mr. NAME
You have requested the Tax Commission to address a number
of issues concerning the application of Utah’s franchise tax and income tax
laws to your client, an out-of-state mortgage banker that services loans in
Utah. The information you provided
indicates that your client is organized as a Limited Liability Company (LLC),
is taxed as a partnership, and is registered to do business in Utah. Your client also is associated with a
wholesale loan originator who is based in Utah. Given this information, we address your specific questions, as
follows:
Question 1.
Nexus. In Tyler
Pipe Industries v. Washington Dep’t of Revenue, 483 U.S. 232 (1987), the
Supreme Court held that a taxpayer established nexus with a state if its
activities there “are significantly associated with the taxpayer’s ability to
establish and maintain a market in this state . . . .” Your client uses a Utah-based loan
originator to solicit sales. The LLC
also services mortgage loans on properties located in Utah and, when necessary,
uses the Utah courts to foreclose on delinquent loans. These are all activities that are
significantly associated with the LLC’s ability to establish and maintain a
market for its mortgage loans in Utah.
Accordingly, we find that the LLC has established nexus with Utah and,
as a result, the LLC’s individual members are subject to Utah’s income tax on
the source income attributable to the LLC.
Question 2.
National Yellow Pages. As
you indicate, your second question is only pertinent if nexus with Utah is not
already attributed to your client in Question 1. As we explained above, the LLC does have nexus with Utah and its
members have Utah source income for income tax purposes. Nevertheless, were a mortgage banker not to
otherwise have nexus with Utah, an activity such as advertising in national
yellow pages where the advertisement showed a Utah-based contact, address, or
phone number would subject that entity to franchise or income tax nexus with
Utah.
Question 3.
Financial Institution. Utah Admin. Rule R865-6F-32 (“Rule 32”) (copy
enclosed) provides guidance on the allocation and apportionment of income for
“financial institutions.” Your client
appears to be in business solely to hold and service real estate
mortgages. As such, it would be
considered a “financial institution” for purposes of the rule because it would
“derive more than 50 percent of its gross income from activities that a person
described [earlier in the rule] is authorized to transact.” See Section (A)(8)(j) of Rule 32.
Accordingly, the amount of income that is attributable to Utah and earned by
the members of the LLC, a financial institution, should be calculated in
accordance with Rule 32.
Question 4.
Filing Requirements. If an
entity is registered to do business in Utah, it is required to file a Utah tax
return, whether or not it has nexus with Utah.
However, such an entity without nexus would not have to include any Utah
sales in the sales factor portion of the income sourcing formula. Again, as your client does have nexus with
Utah, this question is not relevant to your client’s situation.
Question 5.
Tax Forms. An LLC that is
taxed as a partnership and that has nexus with Utah or is registered to do
business in Utah is required to file a Utah partnership return, Form TC-65
(copy enclosed), each year. This form
can also serve as a combined filing report for the individual members of the
LLC if the members do not have any other Utah-source income. However, if a member of the LLC has other
Utah income, that particular individual must file a separate individual Utah
tax return, Form TC-40. The other
members without additional Utah income could still be included on the composite
Form TC-65. If the LLC and its members
are all nonresidents of Utah, then there would be no requirement under Utah
Code Ann. §59-10-402 to submit Utah withholding taxes for the individual
members.
Question 6.
Sourcing. As explained
earlier, income earned by financial institutions is sourced in accordance with
Rule 32. As to the specific sourcing
rules you inquired about, Rule 32 provides as follows:
a.
Loan origination
fees. The rule does not specifically
address the sourcing of loan origination fees.
However, Section (C)(12) provides guidance for determining when receipts
from services not otherwise apportioned under the rule are included in the
numerator of the receipts factor.
b.
Interest income from
loans on real property. Section (C)(4)
provides that interest derived from loans secured by real property is included
in the receipts factor.
c.
Loans as part of the
property factor. Section (D)(1)
provides that a financial institution may elect to either include or exclude
loans in the property factor when sourcing income to Utah.
Should
you have any questions, please contact us.
For
the Commission,
Marc
B. Johnson
Commissioner
Enc.
MBJ/KC
01-013