Information Release

IT-CFT 2004- 01 - Corporation Franchise Tax - Sales Factor Situsing Provisions - April 19, 2004

The purpose of this information release is to explain, in question and answer format, the corporation franchise tax (CFT) sales factor situsing provisions following the adoption of the business/nonbusiness concept enacted by Amended Substitute House Bill 95 (H.B. 95) of the 125th General Assembly and to explain the subsequent amendments to the sales factor situsing provisions enacted by Substitute House Bill 127 (H.B. 127) of the125th General Assembly1.

As defined in Ohio Revised Code section (R.C.) 5733.04(Q) and used in this information release the term "business income' means income arising from transactions, activities, and sources in the regular course of a trade or business and includes income from real property, tangible personal property, and intangible personal property if the acquisition, rental, management, and disposition of the property constitute integral parts of the regular course of a trade or business operation. 'Business income' includes income, including gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill.” As noted below, for taxable years ending on or after the June 26, 2003 effective date of H.B. 95, the Department of Taxation, in general, will presume that all income, gain, loss, and expense is business income. The term “nonbusiness income” is defined in R.C. 5733.04(R) as “all income other than business income.” Business income is apportioned (R.C. 5733.05(B)) and nonbusiness income is allocated (R.C. 5733.051). You can view the text of these new laws by visiting the Ohio General Assembly’s web site at:

www.legislature.state.oh.us/search.cfm.

The CFT amendments to the sales factor computation enacted by H.B. 95 are effective for taxable years ending on or after June 26, 2003, and the CFT amendments to the sales factor computation enacted by H.B. 127 are effective for taxable years ending on or after December 11, 2003. As a result of the effective date of the amendments enacted by each bill, there are three distinct sales factor provisions for tax year 2004. The sales factor law that applies to each franchise taxpayer for tax year 2004 depends on that taxpayer’s taxable year end:

1. If the taxpayer’s taxable year ended prior to the June 26, 2003, then the amendments enacted by H.B. 95 and by H.B. 127 do not apply to the taxpayer’s 2004 report.

2. If the taxpayer’s taxable year ended on or after the June 26, 2003 effective date of H.B. 95 and prior to the December 11, 2003 effective date of H.B. 127, then the amendments enacted by H.B. 95 apply to the taxpayer’s 2004 report, but the amendments enacted by H.B. 127 do not apply to the taxpayer’s 2004 report.

3. If the taxpayer’s taxable year ended on or after the December 11, 2003 effective date of H.B. 127, then the law as amended by H.B. 127 applies to the taxpayer’s 2004 report.

This information release does not apply to Ohio corporation franchise taxpayers that are financial institutions. The apportionment of a financial institution’s net worth is covered under R.C. 5733.056. If you have questions please call 1-800-282-1780 (Ohio Relay Services for the Hearing or Speech Impaired: 1-800-750-0750), or access the department’s website and e-mail your questions to us.

Ohio Corporation Franchise Tax
Apportionment Before and After Amendment by
H.B. 95 and H.B. 127

The responses to the questions in the table that follows reflect the law as it applies to taxpayers whose taxable year ended in each period.

Example

 

Question
For taxable years ending in this period:

Period 1
Taxable years ending
prior to 6/26/03

Period 2
Taxable years ending
on or after 6/26/03 and
prior to 12/11/03

Period 3
Taxable years ending
on or after 12/11/03

Does Ohio franchise tax law distinguish business income from nonbusiness income?

No. The statute does not distinguish business income from nonbusiness income. The following income is allocable whether or not earned in the regular course of business: (i) net rents and royalties from real property and tangible personal property, (ii) capital gains and losses (including recapture income), (iii) dividends, (iv) net rents and net royalties from intangible property, and net technical assistance fees not representing the taxpayer’s principal source of gross receipts, and (v) lottery income.

All income not listed above is apportionable even when not earned in the regular course of business.

Yes. The statute distinguishes business income from nonbusiness income. Business income is apportioned and nonbusiness income is allocated.

Yes. Same as taxable years ending in period 2.

Is all income presumed to be business income?

Not applicable. The statute does not distinguish business income from nonbusiness income.

Yes. All income (including interest and dividend income), gain, loss, and expense is presumed to be apportionable business income or expense; the taxpayer must show otherwise.

Yes. Same as taxable years ending in period 2.

Is rental property included in the property factor of the owner-lessor?

Case law generally provides that rental property is excluded from the property factor. See Illinois Tool Works (1982), 70 Ohio St. 2d 175, (for the exception, see Columbia Properties, Inc. v. Limbach (1989), 42 Ohio St. 3d 75).

Yes. The statute specifically includes in the property factor real property and tangible personal property that the taxpayer rents to others unless the income from such rental property is nonbusiness income.

Yes. Same as taxable years ending in period 2.

Does the law specifically exclude from the net income base apportionment factors property, payroll and sales to the extent that the property, payroll, and sales generate allocable nonbusiness income?

Not applicable.

Yes.

Yes.

Are gross rents included in the sales factor?

No. Because rental income is allocable, gross rents are not included in the sales factor.

Yes. Gross rents are included in the sales factor unless the rental income is nonbusiness allocable income.

Yes. The statute specifically includes gross rents in the sales factor unless the rental income is nonbusiness allocable income.

For gross rents included in the sales factor, how does the statute situs such amounts within and without Ohio?

Not applicable.

Although the statute does not specifically address this question, the Department maintains that (i) rents and royalties from real property located in Ohio are sitused to Ohio, and (ii) rents and royalties from tangible personal property are sitused to Ohio to the extent that the property was used in Ohio.

The statute specifies that (i) rents and royalties from real property located in Ohio are sitused to Ohio, and (ii) rents and royalties from tangible personal property are sitused to Ohio to the extent that the property was used in Ohio.

Is interest included in the sales factor?

No. Although the statute does not specifically address this question, case law excludes interest from the sales factor. See Incom International v. Limbach, BTA No. 84-D-1149 (1-11-88).

No. Same as taxable years ending in period 1.

No. The statute specifically excludes interest from the sales factor whether the in-terest is business income or nonbusiness income.

Are dividends included in the sales factor?

No. Because dividends are allocable, dividends are not included in the sales factor.

No. The Department maintains, based on the Board of Tax Appeals’ decision in Incom International v. Limbach, BTA No. 84-D-1149 (1-11-88), that dividends are not included in the sales factor.

No. The statute specifically excludes dividends from the sales factor whether the dividends are business income or nonbusiness income.

Are receipts from sales of services included in the sales factor?

Yes.

Yes.

Yes.

How does the statute situs receipts from the sale of services within and without Ohio?

Receipts from services are receipts from “sales other than sales of tangible personal property.” The statute provides that such receipts are sitused within and without Ohio based on “cost of performance.”

Same as taxable years ending in period 1.

The statute specifies that receipts from sales of services are sitused to Ohio in proportion to the purchaser's benefit, with respect to the sale, in Ohio to the purchaser's benefit, with respect to the sale, everywhere. The physical location where the purchaser ultimately uses or receives the benefit of what was purchased is paramount in determining the proportion of the benefit in Ohio to the benefit everywhere.

Are receipts from the sale, exchange, or other disposal of capital assets and IRC section 1231 assets included in the sales factor?

No. The statute specifically excludes from the sales factor receipts from the sale or other disposal of capital assets and IRC section 1231 assets.

No. Same as taxable years ending in period 1.

(1) The statute excludes from the sales factor receipts from the sale of tangible personal property and receipts from the sale of real property where such property is a capital asset or a 1231 asset (determined without regard to the holding period).
(2) The statute excludes from the sales factor receipts from the sale of intangible personal property other than trademarks, trade names, patents, copyrights, and similar intellectual property whether or not the intangible property is a capital asset or an ordinary asset.
(3) The statute includes in the sales factor receipts from the sale of trademarks, trade names, patents, copyrights, and similar intellectual property whether or not such intellectual property is a capital asset or an ordinary asset.

Are receipts from the sale of patents, copyrights, and similar intellectual property included in the sales factor?

No. The statute specifically excludes from the sales factor receipts from the sale or other disposal of capital assets and IRC section 1231 assets.

No. Same as taxable years ending in period 1.

Yes. The statute includes in the sales factor receipts from the sale of patents, copyrights, and similar intellectual property.

For receipts from the sale of patents, copyrights, and similar intellectual property that are included in the sales factor, how does the law situs such receipts within and without Ohio?

Not applicable.

Not applicable.

The statute specifies that receipts from the sale of patents, copyrights, and similar intellectual property are sitused to Ohio to the extent that the receipts are based on the amount of use of the intellectual property in Ohio.

Are patent and copyright royalties included in the sales factor?

Gross receipts from patent and copyright royalties are included in the sales factor only if the royalties are apportionable income. Patent and copyright royalties and technical assistance fees are apportionable income if they are the principal source of the taxpayer’s gross receipts, and they are allocable income if they are not the principal source of the taxpayer’s gross receipts.

Yes. Patent and copyright royalties and similar amounts received for granting the right to use intellectual property are included in the sales factor unless they are nonbusiness income.

Yes. The statute includes in the sales factor receipts from the sale, exchange, disposition, or other grant of the right to use trademarks, trade names, patents, copyrights, and similar intellectual property unless the receipts are for nonbusiness income.

For patent and copyright royalties that are included in the sales factor, how does the law situs such amounts within and without Ohio?

Patent and copyright royalties, when included in the sales factor, are “sales other than sales of tangible personal property” and are sitused within and without Ohio based on “cost of performance.”

Patent and copyright royalties and similar amounts received for granting the right to use intellectual property are sitused to Ohio to the extent that the receipts are based on the amount of use of the intellectual property in Ohio.

The statute specifies that receipts from granting the right to use trademarks, trade names, patents, copyrights, and similar intellectual property are sitused to Ohio to the extent that the receipts are based on the amount of use of the intellectual property in Ohio.

Are receipts from the sale of real property inventory included in the sales factor (for example, lots developed and sold by a real estate developer)?

Yes. Receipts from the sale of real property inventory are included in the sales factor.

Yes. Same as taxable years ending in period 1.

Yes. The statute includes in the sales factor receipts from the sale of real property inventory.

How are receipts from the sale of real property inventory sitused within and without Ohio?

Although the statute does not specifically address this issue, the receipts from the sale of real property inventory are sitused to Ohio when the real property is located in Ohio.

Same as taxable years ending in period 1.

The statute specifies that receipts from the sale of real property inventory are sitused to Ohio when the real property is located in Ohio.

Are technical assistance fees included in the sales factor?

Gross receipts from technical assistance fees are included in the sales factor only if the fees are apportionable income. Patent and copyright royalties and technical assistance fees are apportionable income if they are the principal source of the taxpayer’s gross receipts, and they are allocable income if they are not the principal source of the taxpayer’s gross receipts.

Yes. Technical assistance fees are included in the sales factor as “sales, other than sales of tangible personal property.”

Yes. The statute includes in the sales factor receipts from the sale of services and receipts from the grant of the right to use intellectual property.

For technical assistance fees that are included in the sales factor how does the law situs such amounts within and without Ohio?

Technical assistance fees, when included in the sales factor, are “sales other than sales of tangible personal property” and are sitused within and without Ohio based on “cost of performance.”

Technical assistance fees are included in the sales factor and sitused within and without Ohio based on “cost of performance.”

The statute specifies that receipts from the sale of services are sitused to Ohio in proportion to the purchaser's benefit, with respect to the sale, in Ohio to the purchaser's benefit, with respect to the sale, everywhere. The physical location where the purchaser ultimately uses or receives the benefit of what was purchased is paramount in determining the proportion of the benefit in Ohio to the benefit everywhere.

For taxable years ending on or after December 11, 2003 H.B. 127 amended the statute to specifically ex-clude from the sales factor dividends, interest, and receipts, along with the related gains or losses, from the sale or other disposal of “excluded assets.” For those taxable years, can the taxpayer allocate the income associated with the receipts that are excluded from the sales factor?

Not applicable.

Not applicable.

No. The statute specifies that only nonbusiness income is allocated. The statute also specifies that income from receipts that are excluded from the sales factor is not presumed to be allocable nonbusiness income.

 

1Because Ohio law with respect to the income taxation of individuals, estates, and pass-through entities has applied the “business/nonbusiness” definitions since inception of each tax, H.B. 95 has little impact on the income taxation of individuals, estates, and pass-through entities. However, H.B. 127’s amendments to the sales factor computation also apply to the income taxation of individuals, estates, and pass-through entities. So, the “Period 3” discussion appearing in the table also applies to individuals, estates, and pass-through entities other than financial institutions.