United States

Utah: Taxpayer Established that it was a “Sales Factor Weighted Taxpayer”

Jun 25, 2018
From KPMG TaxWatch

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A Utah taxpayer recently appealed an audit assessment based on the taxpayer not qualifying as a “sales factor weighted taxpayer.” Under Utah law, this classification allows taxpayers to use a single sales factor formula to apportion their business income. Under Utah law, a “sales factor weighted taxpayer” is “a taxpayer having greater than 50 percent of its total sales everywhere generated by economic activities” performed by the unitary group, except for manufacturing activities and certain other activities. The taxpayer was a Utah-based unitary group engaged in manufacturing, as well as distributing nutritional and personal care products.  Because the taxpayer manufactured over 80 percent of its products, the Utah State Tax Commission argued that the taxpayer’s manufacturing activities disqualified it as a “sales factor weighted taxpayer.”

Although the taxpayer did not dispute that it manufactured most of its products, the taxpayer argued that Commission did not adequately consider and give weight to its other, non-manufacturing activities. In addition to its manufacturing activities, the taxpayer also operated other establishments in the state, including call centers, a warehouse, a research and development facility, and several back offices. The taxpayer compared the costs of its manufacturing and non-manufacturing facilities and determined that the manufacturing facilities contributed to no more than 31 percent of its total sales everywhere. Because the taxpayer’s qualifying non-manufacturing economic activities contributed more than 50 percent to the generation of its total sales everywhere, the taxpayer contended that it qualified as a “sales factor weighted taxpayer.”

On appeal, the Commission did not challenge the taxpayer’s methodology in calculating its economic activities. Instead, the Commission argued that the taxpayer should be disqualified simply because the taxpayer’s sales consisted primarily of its own manufactured products. The ALJ disagreed with the Commission’s approach, however, noting that this interpretation of the statute ignored the “generated by economic activities” language. The ALJ found that the taxpayer’s methodology, which focused on all of its activities at its various establishments in the state, better reflected the approach intended by the legislature. As such, the ALJ concluded that the taxpayer met its burden on appeal, and that it was primarily a multi-level marketer rather than a manufacturer. The taxpayer thus qualified as a “sales factor weighted taxpayer” for the tax years at issue. Please contact Chris Hoge at 415-963-8241 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.