99-050
Response April 26,
2000
REQUEST LETTER
October 22, 1999
Re: Income and Franchise Tax Liability and Responsibility
I represent a STATE corporation, based in STATE and its subsidiaries. The corporation has numerous subsidiaries whose principal activities involve transportation services. These services include; transportation (primarily trucking) of freight in interstate commerce; unloading and reloading freight for consolidation into full railcar or truckload outbound shipments: loading and unloading of vehicles for railroads; and providing logistics services to industry among other things.
My clients (the parent and its' subsidiaries) are aware of different interpretations of Asubstantial nexus" for motor carriers for the purpose of imposing income and or franchise tax obligations. They wish to determine Utah position concerning their income and franchise tax obligations. In order to determine this position, they want to present the fact pattern described below to the state and wish to have the state give them answers to the questions they pose which follow the description of facts
FACTS
Company P is a STATE corporation and is the parent company of several subsidiaries. It owns 100% of Company T's stock. Company P is an S Corporation and it has no employees. It owns no property in Utah but it does own property in its own corporate name in other states. P has 16 shareholders. None of these shareholders are residents of Utah and none of them own any property in Utah. All of Company P's subsidiaries (including Company T) are Qualified S Subsidiaries as that term is defined in the Internal Revenue Code (created by the enactment of new code section 1361(b)(3)(B) in August, 1996 and effective beginning 1-1-97). The subsidiary companies have all filed Form 966 - Corporate Dissolution or Liquidation with the IRS as suggested by the Department of Treasury in Notice 97-4. Their election to be treated as a qualified S Subsidiary is revocable. All the corporations, parent and subsidiaries, continue to exist under state law. The liquidation described above is for Federal income tax purposes only. It has no impact on any of the corporation=s legal existence under state laws.
Company T is an Illinois corporation whose business is that of a contract motor carrier. T is a Qualified S Subsidiary whose parent is Company P. T has interstate authority to transport freight for other companies on a contract basis. It is precluded under ICC authority from operating anything but interstate movements. There are no intrastate movements (those originating and concluding in the same state). T does not have a freight consolidation dock, nor is any other business property located in your state. Further, T does not employ any personnel in your state; all dispatching, accounting and managerial functions are conducted in other states.
T is registered for Highway Fuel Use Tax and reports liability based on miles driven in your state by independent owner/operators of tractors. During 1998, records show that a total of 76,000 miles were traveled in Utah. This is .13 percent (.13%) of the total miles traveled in all states. The company has agreements with approximately 500 independent owner/operators. At this time none of the owner operators businesses are located in Utah, however, T has had agreements with independent owner operators whose businesses were located in Utah in the past. T enters into
agreements with owner operators in a form like the one enclosed with this letter. T does NOT execute agreements in Utah. It is likely that some of the 500 owner/operators stop in the state
for overnight rests as required by the Department of Transportation. In the future, some independent owner/operators from Utah may have their business based in Utah. If located in Utah they may drive their tractors to their home at night or over the weekend. T also makes pickups and deliveries in Utah as part of an interstate movement of freight. T makes approximately 500 such stops each year in Utah. This is less than 1/10th of 1% of the total number of pickups or deliveries made by the company. T's trucks primarily pass through the state.
T has no sales staff located in your state. T's out-of state sales staff has no knowledge of entering your state for the purpose of soliciting business. T uses some brochures in its sales function and these may find their way into your state through mailings. T is not listed in a local telephone directory in Utah.
QUESTIONS
As stated above, my client's objective in disclosing this information is to ascertain whether the contact with the state described above would subject either of the companies to income or franchise tax. Based on this objective we would ask for answers to the questions listed below.
1. Does Utah recognize the Internal Revenue Code as currently enacted by the Federal Government?
2. Does Utah recognize S Corporation and QSS Corporation status?
3. Does Utah law require an S Corporation to elect to be taxed as an S Corporation or can an S Corporation be taxed as a C Corporation is taxed?
4. Does Utah law require a QSS Corporation to elect to be taxed as an S Corporation or can a QSS Corporation be taxed as a C Corporation is taxed?
5. Based on the facts stated above, does T Corporation have nexus for income and franchise tax purposes in Utah?
6. Would the answer to question 5 change if T Corporation had agreements with independent owner operators whose businesses were located in Utah?
7. Based on the facts stated above, does P Corporation have nexus for income and franchise tax purposes in Utah?
Please send your response to my office at the address shown above. Should you need additional information, please contact my office and we will provide that information to you. If you feel that there is additional information or explanation of your laws and regulations that would be helpful to my client in their situation, please send us that information or give us guidance on how to access the information.
Sincerely
NAME
RESPONSE LETTER
April 26, 2000
NAME
ADDRESS
RE: Advisory Opinion - Taxation of trucking company
Dear NAME,
We have received your request for information pertaining to the taxation of an interstate trucking company that operates in Utah. We offer the following tax guidance in response to your questions:
1. Utah recognizes the Internal Revenue Code as currently enacted, but Utah Corporate Income and Franchise tax law is not strictly patterned after the federal law.
2. Utah recognizes S Corporation and QSS Corporation status.
3. Under Utah law, an S Corporation cannot be taxed as a C corporation, but is taxed in the same manner as it is taxed for federal purposes as provided in Subtitle A, Chapter 1S of the Internal Revenue Code, as modified by Utah law. Utah Code Ann. '59-7-701.
4. Under Utah law, a QSS Corporation is treated in the same manner as it is treated for federal tax purposes under Section 1361 (b) of the Internal Revenue Code. Utah Administrative Rule R865 -6F-34 (copy enclosed).
5. Any foreign corporation qualified to do business under the laws of Utah or doing business in Utah is subject to Utah corporation franchise tax. Utah Code Ann. '59-7-101 (10), Utah Admin. Rule R865-6F-1 (A) and Utah Admin. Rule R865-6F-6 (B). Any nonqualified foreign corporation is subject to Utah income tax if it derives income from revenue-producing properties located in Utah or moving through Utah, such as a freight or transportation operation. Utah Admin. Rule R865-6F-6 (G).
Utah Administrative Rule R865-6F-19 (H) (copy enclosed) specifically addresses the taxation of trucking companies. Under that rule, T must apportion income to this state if, during the tax year it meets any of the following criteria:
a. Owns, rents or leases real or personal property in this state;
b. Makes pick ups or deliveries in this state;
c. Travels more than 25,000 mobile miles in Utah, provided that the mileage in Utah exceeds 3% of the total mileage traveled in all states; or
d. Make 12 or more trips into Utah.
T meets two, and perhaps three, of the conditions stated. It owns or leases property that it operates in Utah (Aa@) to make pick ups and deliveries (Ab@). Although not specifically mentioned in the facts, T presumably makes 12 or more trips into Utah during the tax year (Ad@). It appears that T does not meet Ac@ because its mileage in Utah amounts to only .13% of its total mileage. Therefore, the condition set out in Ac@ is not met. However, as stated above, it is not necessary for T to meet all four standards.
6. T has nexus in Utah whether or not T=s independent operators have businesses in Utah.
7. T=s nexus in Utah creates nexus for P.
I am enclosing a copy of Utah Administrative Rule R865-6F-19, Taxation of Trucking Companies, to provide additional information that may be of interest to you. If you have any additional questions, please let us know.
For the Commission,
Marc B. Johnson
Commissioner
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