The Utah Corporate Franchise Tax: An Overview

Who Pays? By Size and Major Industry

Getting Our Fair Share

A state does not get to tax all the income belonging to a corporation doing business within its borders, but may only tax that part that represents its share of the income generated by the corporation.  Determining the share is, however, fraught with difficulty, since assigning the actual profit created in a state is next to impossible. If XYZ Corporation produces composted fertilizer in Wyoming and ships it to a Utah outlet for sale, where does the profit occur? Utah may like to say that since all the sales occur in Utah, the only cost that can be subtracted from Utah sales is the actual cost of production in Wyoming. The firm may want to take as much of the profit in Wyoming as possible since profits are not taxed there, saying the only profit occurring in Utah is the revenue minus the retailing cost minus the price at the border which would include a healthy profit for Wyoming production.

To get around endless arguments about where the "true profit" occurred, the general practice among the states is to divide the total profit among according to the firm's relative economic presence in the state. Utah defines the presence, as do many other states, as the average of the wage share, the sales share, and the property share in Utah. (See Schedule J in appendix A for further clarification.) The fraction is called the "apportionment fraction," and when it is applied to an amount, such as "net income" it is called "apportioned net income." In simple terms, an apportioned amount is that amount that is relevant for Utah purposes.

In this report, with the exception of the section on apportionment, all data is reported in apportioned form as it is relevant to Utah.

Our Fair Share of What?

What goes in the corporate tax base and what is allowed as a deduction is very complicated, with many fine nuances and details.  As a rule, the state tax base is close to the federal base, with minor exceptions, which we will survey here. (The basic federal return, 1120, is also included in appendix A.)

Table 2.1 reports the magnitude of various income measures for 1998 and 1999. The first panel shows the raw data and the second shows the relation to federal taxable income. (For a better understanding of the various lines, the state table in the appendix should be studied.) For these two years fifteen to twenty percent of income escapes taxation due to Utah provisions or due to not being able to tax non-business income generated out of state. This is considerably higher than in the previous two years. Relative to unadjusted income, the effective tax rates are closer to 4% than to the statutory 5%.

         The dollar amounts reported in this section are for firms paying taxes on the basis of income rather than due to the minimum tax, since the income magnitudes are irrelevant in determining taxes for these firms. Appendix B shows much more detail as well as separate table for minimum tax firms.

	TABLE 2.1
INCOME AND TAX VALUES FOR NON-MINIMUM TAXPAYERS
	1998	1999
RETURNS	7,064	6,999
UNADJUSTED INCOME   (1)	$3,487,862,242	$3,661,705,494
ADJUSTED INCOME   (4)	$3,131,269,115	$3,337,178,627
APPORTIONABLE INCOME   (5)	$3,020,685,191	$3,054,255,406
UTAH TAXABLE INCOME   (12)	$3,029,264,758	$3,056,802,121
NET TAXABLE INCOME   (14)	$2,959,283,600	$2,912,534,911
TAX   (15)	$147,964,180	$145,626,746
The numbers after the title refer to the form line, see appendix A.
RELATIVE TO UNADJUSTED INCOME
UNADJUSTED INCOME	100.00%		100.00%
ADJUSTED INCOME	89.78%		91.14%
APPORTIONED INCOME	86.61%		83.41%
UTAH TAXABLE INCOME	86.85%		83.48%
NET TAXABLE INCOME	84.85%		79.54%
TAX	4.24%		3.98%

TAX  PAYMENTS BY INCOME CLASS

Table 2.2 reports the dollar value and share of taxes paid for non-minimum taxpayers, as reported  on tax returns for 1998 and 1999. The most obvious fact is that a very large share of taxes is paid by the large corporations.  On average, companies with a net apportioned income larger than $1 million paid nearly 80 percent of the taxes, and those with income less than $100,000 paid less than 4.8 percent of the taxes.

TABLE 2.2
	1998				1999
INCOME CLASS	RETURNS	TAXES	SHARE		RETURNS	TAXES	SHARE
$        1 -     2,000	92	$            9,200	0.0%		95	$          9,500	0.0%
$    2,001 -    10,000	1,749	$        452,250	0.3%		1,707	$      436,083	0.3%
$   10,001 -    20,000	946	$        679,856	0.5%		977	$      710,972	0.5%
$   20,001 -    30,000	582	$        715,387	0.5%		580	$      719,293	0.5%
$   30,001 -    40,000	430	$        745,712	0.5%		439	$      763,233	0.5%
$   40,001 -    50,000	373	$        838,163	0.6%		377	$      843,173	0.6%
$   50,001 -    75,000	662	$     2,008,651	1.4%		623	$   1,897,110	1.3%
$   75,001 -   100,000	371	$     1,604,612	1.1%		359	$   1,551,364	1.1%
$  100,001 -   500,000	1,169	$    13,076,154	8.8%		1,154	$  12,871,902	8.8%
$  500,001 - 1,000,000	295	$    10,392,287	7.0%		283	$   9,839,550	6.8%
$1,000,001 - 5,000,000	296	$    32,229,916	21.8%		300	$  30,990,983	21.3%
$5,000,001 -10,000,000	43	$    15,429,265	10.4%		54	$  19,477,832	13.4%
OVER $10,000,000	56	$    69,782,727	47.2%		51	$  65,515,751	45.0%
TOTAL	7,064	$  147,964,180	100.0%		6,999	$145,626,746	100.0%

TAX RETURNS BY INDUSTRY

Table 2.3 is similar in content and structure to the previous table but includes all corporate taxpayers. The Manufacturing sector and the Finance, Insurance, and Real Estate sectors were the top taxpayers, each paying in the 20 percent range, followed by Wholesale Trade. Agriculture and Mining are the trailing sectors, each paying less than $1million each year.

The low share for services may confuse some readers, since much has been made recently of the growing importance of services.  The discrepancy is explained by the narrow definition of services used, which includes basically personal and professional services.  When some analysts indicate services are more than 50 percent of the economy, for example, they are generally including the last five major groups. Additionally, many of the growing service firms are not corporations, or are S-corporations, which are not subject to corporate income taxes.

TABLE 2.3
	1998				1999
INDUSTRY	RETURNS	TAXES	SHARE		RETURNS	TAXES	SHARE
NOT CODED, OTHER, OR NON-DISCLOSABLE	9,680	$   11,211,623	7.5%		9,242	$ 11,498,233	7.8%
AGRICULTURE, FORESTRY, AND FISHING	948	$       399,737	0.3%		834	$     428,589	0.3%
MINING	208	$       985,515	0.7%		197	$     949,323	0.6%
CONSTRUCTION	1,603	$     5,419,522	3.6%		1,538	$   6,241,354	4.2%
MANUFACTURING	1,169	$   30,425,540	20.3%		1,119	$ 27,094,076	18.4%
TRANS., COMM., UTILITIES	613	$   14,084,652	9.4%		591	$ 13,447,258	9.1%
WHOLESALE TRADE	2,084	$   23,580,918	15.8%		2,072	$ 24,166,727	16.4%
RETAIL TRADE	1,777	$   18,029,479	12.0%		1,709	$ 18,426,270	12.5%
FINANCE, INSURANCE, AND REAL ESTATE	1,403	$   29,709,416	19.9%		1,374	$ 29,254,788	19.9%
SERVICES	4,331	$   15,792,978	10.6%		4,375	$ 15,725,328	10.7%
TOTAL	23,816	$ 149,639,380	100.0%		23,051	147,231,946	100.0%