Specialized Industry Formulas

Specialized Industry Formulas Background The evenly weighted three-factor (property, payroll, and ) apportionment formula included in the Uniform Division of Income for Tax Purposes Act (UDITPA) was designed to apportion the net income of multistate manufacturing and mercantile businesses. Accordingly, the application of that standard formula to multistate service-oriented or specialized industry businesses has posed a problem for taxpayers and the states because income allocated under the formula may not fairly represent such taxpayers in-state business activities. In particular, many have questioned the utility of the cost of performance rule found in UDITPA Section 17 for sourcing the in-state receipts of serviceoriented businesses. Under UDITPA Section 17, of services are assigned to the state in which the greatest proportion of the income-producing activity is performed, based on cost of performance. In response, an increasing number of states have enacted statutes or issued regulations providing industry-specific or specialized methods of apportionment. In many instances, the equitable apportionment provisions of UDITPA Section 18, which most states have incorporated into their own statutes, have served as the legal basis for state revenue departments to adopt specialized apportionment methods through regulation. Specialized Apportionment Formulas The Multistate Tax Commission (MTC) has adopted special apportionment regulations covering construction contractors [MTC Reg. IV.18(d)], airlines [MTC Reg. IV.18(e)], railoads [MTC Reg. IV.18(f)], trucking companies [MTC Reg. IV.18(g)], television and radio broadcasting [MTC Reg. IV.18(h)], financial institutions [MTC Reg. IV.18(i)], and publishing [MTC Reg. IV.18(j)]. In general, these special industry regulations modify the rules for including and sourcing (i.e., including in the numerator of the factor) property, payroll, and under the standard three-factor apportionment formula. The most significant modifications are that in certain instances, the cost of performance rule is not used to source receipts, and intangible property is included in the property factor. For example, the publishing regulation calls for the use of a publication s circulation factor; the broadcasting regulation requires the use of a program s audience factor to allocate receipts in certain instances; and the financial institution apportionment regulation includes loans and credit card receivables in the property factor. Many states, by statute or regulation, have adopted some or all of the MTC regulations or have used them as a basis for developing their own statutes or regulations. Some states I-507

have gone further than the MTC and have adopted specialized apportionment statutes or regulations for additional industries, including courier and package delivery services, telecommunications companies, pipeline companies, shippers, franchisers, film producers, securities brokers, professional sports teams, insurance companies, mutual funds, and the fishing industry. In some instances, the primary or secondary motive for a state s adoption of specialized apportionment rules is to foster certain industries present within its borders. As a general rule, states permit only the corporations engaging in a business to which a special apportionment formula applies to use that formula or a valuation method contained in that formula. [See, e.g., Cooper Tire & Rubber Co. v. Limbach, 70 Ohio St. 3d 347 (1994); TTX Co. v. Whitley, No. 92 L 51075 (Ill. Cir. Ct. Aug. 31, 1998).] In most instances, when a corporation is required to use a specialized apportionment formula, all the entity s income would be apportioned under that method. For example, in Texaco-Cities Service Pipeline Company v. McGaw [182 Ill. 2d 269 (1998)], the Illinois Supreme Court ruled that the taxpayer s gain from the sale of its 90 percent interest in a pipeline was apportionable under Illinois s -only apportionment formula for transportation services businesses. When a corporation engages in two businesses, one of which is required to use a special apportionment formula, some states require or permit the use of two apportionment formulas. For example, in Buckeye Pipeline Co. v. Commonwealth [689 A.2d 366 (Pa. Commw. Ct. 1997)], a one percent general partner of four limited partnerships engaged in the interstate transportation of petroleum products through pipelines was permitted to use the single- factor revenue barrel mile apportionment formula for pipeline companies to apportion the portion of its gross receipts attributable to its distributive share of partnership receipts, but also was required to use the standard three-factor formula to apportion gross receipts attributable to management fees received from the partnerships. I-508 Interstate Air Carriers The MTC has adopted a regulation that addresses the apportionment of business income by multistate airlines. [MTC Reg. IV.18(e)] The regulation modifies the standard three-factor property, payroll, and formula used to apportion business income. Property Factor. In general, the property factor denominator includes all owned and leased real and tangible personal property used in the company s business. The numerator includes all owned and leased real and tangible personal property used in a particular state during the income year. The regulation provides a special rule, however, for sourcing aircraft ready for flight. Such aircraft are includible in a particular state s numerator in the ratio of departures of aircraft from locations in that state weighted as to the cost and value of aircraft by type compared to total departures similarly weighted. Aircraft ready for flight are defined as aircraft owned or acquired through rental or lease (but not interchange) that are in the possession of the taxpayer and are available for service on the taxpayer s routes. Payroll Factor. The denominator of the payroll factor includes all compensation paid everywhere by a taxpayer during the income year. The numerator of the payroll factor is the total compensation paid in a particular state during the income year, except for personnel performing services within and without the state. The regulation provides a special rule for the computation of the payroll factor numerator with respect to flight personnel. The payroll of such employees is includible in a particular state s payroll factor numerator in the ratio of departures of aircraft from in-state locations weighted as to the cost and value of aircraft by type compared to total departures similarly weighted, multiplied by the total flight personnel compensation.

Sales Factor. In general, the factor denominator includes all revenue derived from transactions and activities in the regular course of an airline s trade or business, except for passive income and net gains or losses from the sale of aircraft. The numerator of the factor is the total in-state revenue of the taxpayer during the income year. Total in-state revenue consists of 1) the ratio of in-state departures of aircraft weighted as to the cost and value of aircraft by type compared to total departures similarly weighted, multiplied by the total transportation revenue, and 2) any directly attributed nonflight revenues. The States. A number of states have formally adopted the MTC regulation; other states have adopted variations of the regulation or their own rules for apportioning air carrier income. Some states require air carriers to use a three-factor aircraft arrivals and departures, revenue tons handled, and originating revenue formula to apportion income. Some states require an air carrier to use a single-factor formula based on revenue miles or revenue ton miles to apportion income. Courts in Illinois and Virginia have held that air carriers were not required to include flyover miles in computing their states apportionment percentages. In Northwest Airlines, Inc. v. Department of Revenue [No. 1-96-4267 (Ill. App. Ct. Mar. 20, 1998)], the Illinois Appellate Court held that Northwest Airlines and Republic Airlines were not required to include flyover miles in the numerator of their single-factor apportionment formula. Illinois requires airlines to use a single-factor apportionment formula, the numerator of which is the revenue miles of the person in Illinois, and the denominator of which is the revenue miles of the person everywhere. In reaching its decision, the court held that the state lacked sufficient nexus to tax the flyover miles. Similarly, in Delta Air Lines, Inc. v. W.H. Forst [No. 93-1238 (Va. Cir. Ct. Jan. 27, 1998)], the court held that overflight miles were improperly included in Delta Airline s Virginia apportionment formula. Delta used a three-factor property, payroll, and formula to apportion its income. In computing its property factor, Delta applied a mileage formula for purposes of sourcing aircraft. Delta included actual arrival and actual departure miles in the numerator because only those miles related to the airline s use of Virginia facilities and services. Delta excluded overflight miles from the numerator of the mileage formula. In computing its factor, Delta also used a mileage formula for sourcing passenger and cargo revenue. In addition, Delta excluded overflight miles from the numerator of its mileage formula. In reaching its holding, the court examined the relevant statutory provisions. The court found that for property to be included in the property factor numerator, the statute required that property to be used in Virginia. Likewise, the factor numerator could only include in Virginia. The court concluded that property used in Virginia and in Virginia were not equivalent to property used over Virginia and attributable to activities occurring over Virginia. In addition, the court held for Delta on its constitutional and federal preemption arguments. Interstate Trucking Companies The MTC has adopted a regulation that addresses the apportionment of business income by multistate trucking companies. [MTC Reg. IV.18(g)] The regulation modifies the standard three-factor property, payroll, and formula used to apportion business income. Property Factors. In general, the property factor denominator includes all owned and leased real and tangible personal property used in a trucking company s business. The numerator includes all owned and leased real and tangible personal property used in a particular state during the income year. The regulation provides a special rule, however, I-509

for sourcing mobile property. That is, mobile property located solely within a particular state is includible in that state s property factor numerator, but mobile property located within and without a particular state during the income year is included in the numerator in the ratio that mobile property miles in the state bear to total mobile property miles. A mobile property mile is defined as the movement of a unit of mobile property a distance of one mile whether loaded or unloaded. Payroll Factor. The denominator of the payroll factor includes all compensation paid everywhere by a taxpayer during the income year. The numerator of the payroll factor is the total compensation paid in a particular state during the income year, except for personnel performing services within and without the state. The regulation provides a special rule with respect to the computation of the payroll factor numerator when personnel perform services within and without the state: the payroll of those employees is includible in a particular state s payroll factor numerator in the ratio that their services performed in that state bear to their services performed everywhere based on mobile property miles. Sales Factor. In general, the factor denominator includes all revenue derived from transactions and activities in the regular course of a trucking company s trade or business. The numerator of the factor is the total in-state revenue of the taxpayer during the income year; however, the regulation provides special rules for sourcing revenue from hauling freight and mail. A trucking company will be required to include in a particular state s numerator all receipts from any shipment that originates and terminates within that state. With respect to interstate shipments, the amount of revenue included in a particular state s numerator will be determined by the ratio that the mobile property miles traveled by such movements or shipments in that state bear to total mobile property miles traveled by movements or shipments from points of origin to destination. The States. A number of states have formally adopted the MTC regulation; other states have adopted variations of the regulation or their own rules for apportioning air carrier income. Many states require a trucking company to use a single-factor formula based on either mileage or revenue miles to apportion income. I-510 Telecommunications Service Providers Most states require telecommunications service providers to use their standard apportionment formulas. Some states have adopted regulations that modify their standard property, payroll, and apportionment formula rules for telecommunications companies. For example, in computing its factor numerator, Kentucky requires a telephone and telegraph company to include gross receipts from or services billed to in-state customers, access fees from long distance carrier services rendered by the local company in Kentucky, and gross receipts from other sources as determined under the regular sourcing rules. In computing its property factor, a telephone and telegraph company is required to exclude from the numerator and denominator property owned or leased in outer space. Some states permit or require telecommunications companies to use a single-factor apportionment formula. For example, Kansas permits qualifying telecommunications companies to elect to use a single-factor apportionment formula, the numerator of which is the information-carrying capacity of wire and fiber optic cable available for use in Kansas and the denominator of which is the information- carrying capacity of wire and fiber optic cable available for use everywhere. Mississippi requires public service utilities (which include telephone and telegraph companies) to use a single-factor apportionment formula based on gross operating revenue.

Effective March 20, 2005, for Louisiana corporate income tax purposes, gross apportionable income attributable to Louisiana from providing telephone, telecommunications, and similar services includes: 1) revenue derived from charges for providing telephone access from a Louisiana location 2) revenue derived from charges for unlimited calling privileges if the charges are billed by reference to a service address located in the state; 3) revenue from intrastate telephone calls or other telecommunications, except for mobile telecommunication services, beginning and ending in Louisiana; and 4) revenue from interstate or international telephone calls or other telecommunications, except for mobile telecommunication services, either beginning or ending in Louisiana if the service address charged for the call or telecommunication is located in Louisiana, regardless of where the charges are billed or paid. Revenue from mobile telecommunications services is attributed to the place of primary use, which is the residential or primary business street address of the customer [La. Dept. of Rev., Regs. 306 and 1134]. Sports/Entertainment Activities Some states have adopted special apportionment rules for professional sports teams. For example, under California s statutory scheme for apportioning the income of professional sports teams, only teams with their operations based in California are subject to tax. All of a California-based team s property, payroll, and will be sourced to California. An exception to the rule applies if a California-based team is required to allocate or apportion its business income to another state or country and pay an income tax or franchise tax measured by income to the other state or country. In such an instance, the California-based team is permitted to reduce its business income subject to California tax by the amount of allocated and apportioned business income taxed by the other state or country. In addition, any team in the same league that has its operations based in the other state or country is subject to California tax on business income allocated and apportioned to California in a manner consistent with the method of allocation and apportionment imposed by the other state or country. Wisconsin taxes professional sports teams doing business in Wisconsin. Wisconsin s regulation provides for modifications to the property, payroll, and factors. In computing the property factor, Wisconsin excludes minor equipment, including uniforms and playing and practice equipment. In computing the payroll factor, Wisconsin requires bonuses and payments to be included on a prorated basis in accordance with federal income tax law. With respect to the computation of the factor, a team whose home facility is in Wisconsin is required to include in its numerator all gate receipts from games played at its home facility. A taxpayer whose home facility is outside of Wisconsin is required to include the percentage of gate receipts received from games played in Wisconsin. The Wisconsin regulation also provides for the sourcing of radio and television receipts from national and local broadcasting contracts, concessions, and miscellaneous income. Radio and television receipts from league or association contracts with major communications networks are includible in the factor numerator in proportion to the number of games played in Wisconsin to total games played by the taxpayer covered by the contract during the season. Local television and radio receipts are sourced in Wisconsin if the games are played in Wisconsin. A taxpayer is required to include concession income and other miscellaneous income (e.g., parking lot income, advertising income) in the factor numerator if the activity giving rise to the income occurs in Wisconsin. Income from player contract transactions, franchise fees, and similar sources is excluded from both the factor numerator and denominator. I-511

Financial Institutions The MTC regulation governing the apportionment of income for financial institutions represents a compromise between the money-center states, the market states, and representatives from several of the largest financial institutions. [MTC Reg. IV.18(i)] Accordingly, the adopted regulation includes a combination of money-center and market-state approaches and several simplified sourcing rules. Although the regulation does not contain a definition of financial institution, a definition is included as a suggested regulation in an appendix to the proposed regulation. The apportionment formula for financial institutions is the standard three-factor formula consisting of equally weighted, payroll, and property factors. The factor is primarily market-state focused, although it includes both market-state and money-center approaches. The payroll factor is similar to the general rules found in UDITPA and the MTC regulations. In addition to including all real and tangible personal property owned or leased by the financial institution, the property factor includes two intangible assets: loans and credit card receivables. The property factor does not, however, include currency, deposits, or foreclosed property. The receipts factor is primarily market-state or destination driven. The denominator of the receipts factor includes 1) receipts from the lease of real property, 2) receipts from the lease of tangible personal property, 3) interest from loans secured by real property, 4) interest from loans not secured by real property, 5) net gains from the sale of loans, 6) receipts from credit card receivables, 7) net gains from the sale of credit card receivables, 8) credit card issuers reimbursement fees, 9) receipts from merchant discounts, 10) loan servicing fees, 11) receipts from services, 12) receipts from investment assets and activities and trading assets and activities, and 13) all other receipts. In 1994, the MTC adopted a model statute for apportioning the income of a financial institution [see Recommended Formula for the Apportionment and Allocation Of Net Income of Financial Institutions (Nov. 17, 1994)]. Insurance Companies Most states do not subject insurance companies to a corporate income tax. Many states that impose an income tax on insurance companies require those companies to use a singlefactor premiums written formula to apportion income. The composition of the formula may vary from state to state. For example, Connecticut provides that the numerator of the formula consists of a domestic insurance company s gross direct premiums for insurance on property or risks located or resident in the state and the denominator consists of total gross direct premiums received during the income year from all sources. When more than 50 percent of the gross premiums received during the income year are reinsurance premiums, the fraction includes reinsurance premiums. Some states require certain domestic insurance companies to use a two-factor premiums and payroll apportionment formula. There are also a handful of states that have no special apportionment rules for insurance companies. I-512 Mutual Funds Most states have not enacted or adopted special apportionment formulas for mutual funds. An exception is Minnesota, which requires investment companies to use a singlefactor apportionment formula whose numerator consists of the aggregate of the gross payments collected during the taxable year from old and new business on investment contracts issued by the company and held by Minnesota residents and whose denominator

consists of the total amount of the gross payments collected during the year from old and new investment contracts issued by the company and held by persons residing everywhere. Some states have enacted special apportionment formulas for investment company service corporations. For example, Connecticut permits corporations that provide management, distribution, or administrative services (management services) to or on behalf of a regulated investment company to elect to apportion their net income directly or indirectly related to the providing of those services using a single-factor apportionment formula. The numerator of the fraction consists of Connecticut receipts, and the denominator consists of the total receipts from the sale of management services to or on behalf of all the regulated investment companies. Connecticut receipts are determined by multiplying receipts from the rendering of management services to or on behalf of each separate regulated investment company by a fraction, the numerator of which is the average number of shares of such regulated investment company owned by shareholders domiciled in Connecticut at the beginning and end of the entity s tax year and the denominator of which is the average number of shares owned by all shareholders of the regulated investment company during that period. The statutory apportionment provisions in Massachusetts and Rhode Island are similar to Connecticut s rules. Under legislation enacted by Kansas in 2002, investment fund service corporations that employ at least 100 full-time workers in Kansas may elect to apportion income to Kansas based on the ratio of the mutual fund shares of the taxpayer s clients that are owned by Kansas residents to shares owned by shareholders everywhere. [Kan. S.B. 39 (May 30, 2002)] Service Providers In general, a service provider is defined as a corporation whose net income is not derived primarily from the manufacture, sale, or use of tangible personal or real property. The states are split on whether to examine only a corporation s in-state activities for purposes of classifying that entity as a service provider. Some states examine both a corporation s instate and out-of-state business activities to ascertain whether that company is a service provider. Other states have indicated that they will make the determination based only on the corporation s in-state activities. Virtually all of the states require service providers that are not covered under other specialized industry apportionment formulas (e.g., transportation companies) to use their state s standard apportionment formula. Some states, however, require service providers that are not covered under specialized industry apportionment formulas to use a singlefactor gross receipts apportionment formula. For purposes of sourcing gross receipts from the sale of services, most states continue to apply the greater cost of performance rule. Georgia, Iowa, Maryland, Minnesota, and Ohio, however, require the inclusion of gross receipts in the factor if the receipts are derived from customers within the state or are otherwise attributable to the state s marketplace. Manufacturers, Retailers, and Lessors Almost all states require manufacturers, retailers, and lessors of real and personal property to use their state s standard apportionment formula. There are a few exceptions to that general rule. Mississippi requires wholesalers, retailers, and lessors that do not engage in manufacturing to use a single-factor gross receipts formula. A manufacturerretailer is required to use a three-factor property, payroll, and double-weighted factor I-513

apportionment formula; a manufacturer-wholesaler is required to use a three-factor property, payroll, and apportionment formula. Maryland requires a leasing company to use a two-factor receipts and property formula. If certain statutory conditions are met, Oklahoma permits a manufacturing enterprise whose only in-state activities consist of marketing its products to use a -only formula to apportion income. Minnesota permits telephone or mail- order companies that have at least 99 percent of their property and payroll within the state to use a -only formula to apportion income. Some states have enacted special apportionment rules that generally benefit in-state manufacturers. For example, as a result of legislation enacted in 2000, beginning in 2001 manufacturers may use a -only formula in Connecticut and Massachusetts. In addition, in response to legislation enacted in 2001 (H.B. 11), the Maryland Comptroller of the Treasury adopted a rule that requires manufacturing corporations to use a -only formula. [Md. Regs. 03.04.03.10 (Feb. 22, 2002)] Likewise, Florida permits a citrus processing company to apportion its income based solely on the factor. [Fla. Stat. Ann. 220.151(3)] I-514 Television and Radio Broadcasters In 1990, the MTC adopted a regulation dealing with the apportionment of business income by multistate taxpayers in the television and radio broadcasting industry. [MTC Reg. IV.18(h)] The regulation modifies the standard three-factor property, payroll, and formula used to apportion business income. In April 1996, the MTC adopted amendments to the regulation in order to gain broader acceptance among the states. The amended regulation covers a broadcaster over the public airwaves, by cable (direct or indirect), by satellite transmission, or by any other means of communication that is taxable in at least two states. Property Factor. In general, the property factor denominator includes all owned and leased real and tangible personal property used in the broadcaster s business. In the case of rented studios, the net annual rental rate generally includes only the amount of a studio s basic or flat rental charge for the use of a stage or other permanent equipment. In addition, the denominator includes (at original cost) audiocassettes or videocassettes, discs, or other similar media containing film or radio programming that the taxpayer intends to sell for home viewing or listening. A broadcaster is required to capitalize, at a rate of eight times gross receipts, any license, royalty, or other fees that it receives from the licensing of cassettes, discs, or other media for home viewing or listening. The property factor numerator includes all real and tangible personal property located or used in a particular state during the tax period. Property used in more than one state is allocated to a particular state on the basis of number of days located or used within that state compared to the total number of days such property was owned or rented during the tax year. Outer-jurisdictional property (e.g., orbiting satellites, undersea transmission cables) and the value or cost attributable to any film or radio programming are excluded from both the numerator and denominator of the property factor. Payroll Factor. The denominator of the payroll factor comprises all compensation, including residual and profit participation payments, paid to employees during the tax period; that includes compensation paid to directors, actors, newscasters, and other talent in their status as employees. Previously, the denominator could include amounts paid to third parties for providing the services of directors, actors, newscasters, and other talent for live programming if the payments constituted at least 25 percent of the total compensation

paid to employees and the failure to include those amounts would not result in a proper reflection of the taxpayer s in-state activities. The payroll factor numerator comprises compensation paid to employees as determined under the standard sourcing rules. Previously, the numerator also included payments made to third parties. Sales Factor. In general, the factor denominator includes all gross receipts (i.e., domestic and foreign based) that a broadcaster derives in its trade or business. In determining the factor numerator, an audience factor is used to ascertain the portion of a broadcaster s in-state gross receipts including advertising revenue from live programming. A television or radio station s in-state audience factor is the ratio of the broadcaster s in-state viewing or listening audience to its total viewing or listening audience. A cable television system s in-state audience factor is the ratio of the system s in-state subscribers to its total subscribers. Under the original MTC regulation, gross receipts derived from broadcasts to audiences located outside the United States were excluded from the base to which the audience factor was applied. In addition, the audience factor denominator included only the U.S. viewing or listening audience and the U.S. total cable subscribers. Receipts from the sale, rental, or licensing of audiocassettes or videocassettes, discs, or similar media intended for home viewing or listening are sourced under the standard apportionment rules. The States. Some states have conformed to the MTC broadcasting regulations. For example, in 2004, the Montana Department of Revenue adopted the MTC rules and guidelines for apportioning the income of companies in the business of broadcasting film or radio programming, as well as companies in the business of publishing, selling, licensing or distributing printed material [Mont. Reg. 42.26. 1001 to 1103, Apr. 23, 2004]. Nonetheless, a number of states have adopted their own rules that use an audience factor as a basis for apportioning certain types of income. A majority of states have not adopted specialized apportionment rules for broadcasters. In at least one state Maryland a court has held that a revenue department s attempt to use an audience factor to source advertising revenue constituted improper rulemaking. [CBS, Inc. v. Comptroller of the Treasury, 319 Md. 687 (1990)] Maryland treats broadcasters as service providers. In 2002, Louisiana enacted legislation providing that broadcast revenue be apportioned using an audience factor. [La. H.B. 141 (June 25, 2002)] Other Specialized Industries. Modifications to the general three-factor formula for specialized industries can range from minor to monumental. For example, some states require construction contractors to modify the property factor to account for construction in progress, regardless of the accounting method used. In determining apportionment for the railroad industry, the MTC regulations have modified the property factor for movable property (based on railroad car miles). The factor is also adjusted for freight and passenger miles. Some states have enacted similar statutes for trucking companies. For interstate carriers, the usual three factors have been modified for mobile property, payroll of personnel moving interstate, and of personal property hauled interstate. The modified formula generally uses a ratio of mobile property miles in the three factors. MTC Regulation IV.18(j) governs the apportionment of business income derived from publishing, selling, licensing, or distributing printed materials. The publishing regulation provides for the use of the standard three-factor formula consisting of evenly weighted, payroll, and property factors. Under the regulation, publishing revenues and advertising receipts are included in the numerator of the factor based on a circulation factor. The circulation factor, which must be determined for each publication or printed material that includes advertising, generally is equal to the ratio that the taxpayer s in-state circulation I-515

to purchasers and subscribers of printed material bears to its total circulation to purchasers and subscribers as determined by reference to rating statistics. Like the factor in other MTC regulations, the factor in the publishing regulation includes a throwback provision. The publishing regulation s payroll factor is similar to the general rules found in UDITPA and the other MTC regulations. In addition to including all owned and rented real and tangible personal property, the property factor includes orbiting satellites and undersea transmission cables that are used in the business. The cost of outer-jurisdictional property to be included in the numerator of the property factor for a given state generally is determined by the number of uplinks and downlinks that were used to transmit information from and receive information in that state. A taxpayer generally is permitted to petition for, or a tax administrator is allowed to require, alternative apportionment methods if the normal apportionment and allocation provisions do not fairly represent the extent of the taxpayer s business activity in the state. Relief under such a provision generally is accomplished by excluding one or more factors, including one or more additional factors, or modifying the methodology of the existing factors. State-by-State Summary The chart that follows is divided into three parts for ease of presentation. Part 1 summarizes the apportionment formulas for airlines, trucking companies, telecommunications companies, and sports and entertainment companies. Part 2 covers financial institutions, insurance companies, and mutual funds. Part 3 summarizes the apportionment formulas for service companies, retailers, and broadcasters. I-516

Specialized Industry Formulas (Part 1) Legend: NA Not applicable NR Not reported Telecommunications Interstate Motor Vehicles Sports/ Entertainment Activities Interstate Air Gross receipts or ; tangible property; mileage Alabama Gross receipts or ; tangible property; mileage Alaska Arizona Revenue miles NA Mileage NA Arkansas Gross receipts or California gross receipts or. Optional apportionment formula tangible property; gross receipts or gross receipts or. Optional apportionment formula tangible property; gross receipts or MTC special regulations Colorado MTC special regulations Mileage NA Connecticut Arrivals/departures; revenue tons; originating revenue I-517

Specialized Industry Formulas (Part 1) (continued) Legend: NA Not applicable NR Not reported Sports/ Entertainment Activities I-518 Telecommunications Interstate Motor Vehicles Interstate Air Delaware No, 1 /3, 2 /3 No, 1 /3, 2 /3 Revenue tons; revenue miles Revenue tons; revenue miles District of Columbia Florida Revenue miles NA Revenue miles NA NA Same as other businesses NA NA Same as other businesses Same as other businesses No, revenue Georgia Revenue miles, tons handled, originating revenue NA NA Hawaii Revenue tons; flight originating revenue; flight operating hours ; single weighted factor for telephone corporations Idaho

Illinois Revenue miles NA Revenue miles NA Gross receipts or See Note 1. Gross receipts or See Note 1. Note 1. For taxable years ending on or after 12/31/00, the apportionment factor for taxpayers with business income is calculated using only the factor. See IITA 304(a), (h). For taxable years ending after 12/31/99 and before 12/31/00, property 8 1 /3, payroll 8 1 /3, and 83 1 /3. payroll; Indiana Tangible property, payroll, Iowa Mileage NA Mileage NA Gross receipts or NA Gross receipts or NA Mileage NA Fiberoptic mileage NA Kansas Line mileage of public utilities; gross receipts or Line mileage of public utilities; gross receipts or Line mileage of public utilities; gross receipts or Kentucky Line mileage of public utilities; gross receipts or or payroll and Louisiana Maine Gross receipts or ; tangible property; payroll NA Gross receipts or ; tangible property; payroll One-factor formula of allocated on basis of revenue miles Maryland NR NR NR NR. payroll;. Massachusetts No, 5%, 90%, 5% No, 5%, 90%, 5% Revenue miles NA Revenue miles NA Michigan (Single Business Tax VAT) I-519

I-520 Specialized Industry Formulas (Part 1) (continued) Legend: NA Not applicable NR Not reported Sports/ Entertainment Activities Telecommunications Interstate Motor Vehicles Interstate Air No, 12.5%, 12.5%, 75% Property; payroll; gross receipts or. All income from the operation of an athletic team when the visiting team does not share in the gate receipts is assigned to the state in which the team s operation is based. No, 12.5%, 12.5%, 70% Property; payroll; gross receipts or No, 12.5%, 12.5%, 75% payroll; No, 75%, 12.5%, 12.5% Minnesota Revenue tons; payroll; tangible property NA Gross receipts or NA Gross receipts or NA NA Revenue tons; or vehicle miles Mississippi Revenue miles, or flight miles NA Property; payroll gross receipts or Missouri Revenue miles NA Revenue miles NA Line mileage of public utilities gross receipts or ; revenue miles Montana Other, see ARM 42.26.801 807 NA Mobile property miles NA Gross receipts or NA Gross receipts or NA Nebraska Departures weighted to cost and value Nevada Nevada does not impose a corporate income tax....................................................................... New Hampshire NR NR NR NR NR NR NR NR

(special rule for receipts) New Jersey (special rules on tangible personal property) Revenue miles NA New Mexico Revenue miles NA NA NA New York Arrivals/departures; originating revenue; revenue tons Does not reflect special sourcing for receipts of many of these industries....................................................... North Carolina Revenue miles NA Revenue miles NA Gross receipts or NA gross receipts or (revenue miles for interstate) North Dakota No, 20%, 60%, 20% net No, 20%, 60%, 20% net No, 20%, 60%, 20% net No, 20%, 60%, 20% Ohio net payroll; revenue tons Oklahoma payroll; revenue miles No, 10%, 80%, 10% No, 10%, 80%, 10%; for tax years beginning on or after 5/1/03 may elect 25%, 50%, 25% No, 10%, 80%, 10% (revenue miles used to determine numerator) No, 10%, 80%, 10% Oregon (departures used to determine numerator) I-521

I-522 Specialized Industry Formulas (Part 1) (continued) Legend: NA Not applicable NR Not reported Sports/ Entertainment Activities Telecommunications Interstate Motor Vehicles Interstate Air No, 20%, 60%, 20% No, 20%, 60%, 20% Pennsylvania Revenue miles NA Revenue miles NA Rhode Island Special regulation NA Special regulation NA Special regulation NA South Carolina Revenue tons NA Revenue miles NA Gross receipts or NA Gross receipts or NA South Dakota South Dakota does not impose a corporate income tax................................................................... Gross receipts or ; revenue miles Tennessee Gross receipts or ; revenue miles Texas Gross receipts NA Gross receipts NA Gross receipts NA Gross receipts NA Utah Vermont

Mileage NA Virginia, property and factors are calculated using mileage, including overflight miles, in the numerator and denominator with use of departures as an alternative. Washington Washington does not impose a corporate income tax..................................................................... Revenue miles NA West Virginia ; Rule Tax 2.505 Originating revenue; revenue or ton miles; Rule Tax 2.47 Wisconsin Revenue tons handled; arrivals/departures; originating revenue; Rule Tax 2.46 Wyoming Wyoming does not impose a corporate income tax....................................................................... I-523

I-524 Specialized Industry Formulas (Part 2) Legend: NA Not applicable NR Not reported Mutual Funds Insurance Companies Financial Institutions NA gross receipts or NA NA, insurance companies pay premium tax (Dept. of Insurance). Alabama NA, financial institutions must file an excise tax return. Exempt NA gross receipts; payroll Alaska gross receipts or gross receipts or gross receipts or Arizona gross receipts or gross receipts or Exempt if pay Arkansas premium tax; if taxable, tangible property; gross receipts or Arkansas gross receipts or NA NA gross receipts or California gross receipts or NA Standard UDITPA: Tangible property; (optional apportionment formula includes tangible property; ) Colorado MTC Special Regulations Subject to insurance premium tax Connecticut Gross receipts or NA Exempt NA Exempt NA NA gross receipts or NA NA, exempt from corporate income tax Delaware NA, exempt from corporate income tax NA gross receipts or NA, exempt from corporate income tax Gross receipts or ; payroll District of Columbia

Premiums written NA gross receipts or Florida Intangibles and tangible property; NA Same as other businesses NA Georgia Same as other businesses NA NA, exempt if subject to premiums tax Hawaii NA NA NA NA gross receipts or NA gross receipts or Exempt if pay a premiums tax. Idaho gross receipts or NA NA Premiums written NA Business income sourced in Illinois, see IITA 304(c) Illinois Business income sourced in Illinois, see IITA 304(c) Indiana Gross receipts or NA Premiums written NR Gross receipts or NA NA Exempt from tax NA NA Subject to Iowa premiums tax Iowa Subject to Iowa franchise tax NA NA See apportionment method for investment fund service corporations. NA Exempt from corporate income tax (does not include agencies) Kansas Exempt from corporate income tax (banks, credit unions, savings and loans) NA Line mileage of public utilities; Exempt from corporate income tax Kentucky Gross receipts or ; payroll; Line mileage of public utilities NA NA NA, no specific apportionment formula exists Louisiana payroll Other. See La. Rev. Stat. 47:221 and 47:227 No, gross receipts or NA gross receipts or. May elect special apportionment under 5212 Premiums written if subject to premiums tax Maine gross receipts or I-525

I-526 Specialized Industry Formulas (Part 2) (continued) Legend: NA Not applicable NR Not reported Mutual Funds Insurance Companies Financial Institutions NA Exempt from tax NA Gross receipts or ; tax administered by the Department of Licensing and Regulation, Insurance Division Maryland Gross receipts or ; tangible property; payroll NA NR NA NR NA Massachusetts See TIRs 95-1, 00-06 04-6; LR 01-9 No, 90%, 5%, 5% Gross business NA Premiums written NA Gross receipts or ; tangible property; payroll Michigan (Single Business Tax VAT) NA NA Gross receipts or NA No, 12.5%, 12.5%, 75% Minnesota Tangible property (includes receivables); payroll; gross receipts or Separate accounting NA Gross receipts or NA Mississippi payroll; or gross receipts Exempt from tax NA Exempt from tax NA Missouri gross receipts or Subject to premiums tax NA gross receipts or Montana gross receipts or Nebraska Exempt from tax NA Premiums written NA Gross receipts or NA Nevada Nevada does not impose a corporate income tax.......................................................................

New Hampshire NR NR NR NR NR NR Sales NA gross receipts; payroll (special rules for management companies and special rate for regulated investment companies) Taxed under insurance premium tax Sales ; special rate for regulated investment companies New Jersey gross receipts or gross receipts or gross receipts or New Mexico gross receipts or No Premium written; salaries No, 90%, 10% gross receipts or New York For banks only, receipts; payroll (except general executive officers); deposits Does not reflect special sourcing rules for receipts of many of these industries.................................................. North Carolina Gross receipts or NA Premiums written NA Gross receipts or NA NA ; payroll North Dakota Use NDCC Ch. 57-35.3 NA Exempt if Premiums Tax paid Ohio Net worth only NA NA NA NA NA NA gross receipts or Oklahoma Separate accounting NA Exempt (premiums tax imposed) NR NR Payroll; premiums written; real estate income and interest on real property loans No, 10%, 80%, 10% Oregon Tangible property and intangible property; gross receipts or Pennsylvania Value of shares NA Premiums written NA NA NA Premiums written NA gross receipts or Rhode Island gross receipts or I-527

I-528 Specialized Industry Formulas (Part 2) (continued) Legend: NA Not applicable NR Not reported Mutual Funds Insurance Companies Financial Institutions NA Gross receipts or NA South Carolina Gross receipts or NA Premium tax paid to Insurance Commission South Dakota South Dakota does not impose a corporate income tax................................................................... NA Premiums written NA Gross receipts or NA Tennessee Receivables (all financing income) NA Gross receipts or NA Texas Gross receipts or NA Exempt from franchise tax if annual gross premiums insurance tax is paid gross receipts or gross receipts or Utah gross receipts or Exempt NA gross receipts or Vermont gross receipts or NA NA Exempt (pass through entity) Virginia Cost of performance NA Exempt (premium tax in lieu of income tax) Washington Washington does not impose a corporate income tax.................................................................... gross receipts or double weighted West Virginia Gross receipts or NA gross receipts or Premiums written; payroll gross receipts or Wisconsin Gross receipts or ; payroll; Rule Tax 2.49 Wyoming Wyoming does not impose a corporate income tax......................................................................

Specialized Industry Formulas (Part 3) Legend: NA Not applicable NR Not reported Service Business Retailers Broadcasting Alabama Alaska Arizona Arkansas California NA MTC Special Regulations (optional apportionment formula includes tangible property; gross receipts or ) Colorado (Optional apportionment formula includes tangible property; gross receipts or ) NA Gross receipts or NA Connecticut Gross receipts or I-529

I-530 Specialized Industry Formulas (Part 3) (continued) Legend: NA Not applicable NR Not reported Service Business Retailers Broadcasting Delaware District of Columbia Florida Georgia Hawaii factor doubled ; singleweighted factor for electrical companies ; singleweighted factor for electrical companies Idaho See Note 1. See Note 1. Gross receipts or See Note 1. Gross receipts or Illinois Gross receipts or Note 1. For taxable years ending on or after 12/31/00, the apportionment factor for taxpayers with business income is calculated using only the factor. See IITA 304(a), (h). For taxable years ending after 12/31/99 and before 12/31/00, property 8 1 /3, payroll 8 1 /3, and 83 1 /3.

Indiana NA Population NA NA Gross receipts or Iowa Gross receipts or Kansas Line mileage of public utilities; gross receipts or Line mileage of public utilities; gross receipts or Kentucky Line mileage of public utilities; gross receipts or NA Television, radio, and other broadcasting, see R.S. 47.287.95(k) Louisiana Gross receipts or Maine Gross receipts or ; tangible property; payroll double weighted Maryland Gross receipts or ; tangible property; payroll Massachusetts NR NR NR NR NR NR No, 5%, 90%, 5% No, 5%, 90%, 5% No, 5%, 90%, 5% Michigan (Single Business Tax VAT) No, 12.5%, 12.5% and 75% payroll; No, 12.5%, 12.5% and 75% payroll; No, 12.5%, 12.5%, 75% Minnesota payroll; I-531

I-532 Specialized Industry Formulas (Part 3) (continued) Legend: NA Not applicable NR Not reported Service Business Retailers Broadcasting NA NA Gross receipts or NA Gross receipts or Mississippi Gross receipts or Missouri Montana NA NA Gross receipts or NA Gross receipts or Nebraska Gross receipts or Nevada Nevada does not impose a corporate income tax.................................................................... New Hampshire NR NR NR NR NR NR (special rule for receipts) New Jersey gross receipts or (special rule for receipts) New Mexico

New York Does not reflect special sourcing rules for receipts of many of these industries............................................... NA Gross receipts or North Carolina North Dakota No, 20%, 60%, 20% No, 20%, 60%, 20% net No, 20%, 60%, 20% net Ohio net Oklahoma No, 10%, 80%, 10% No, 10%, 80%, 10% (numerator determined by Oregon audience over audience everywhere) No, 10%, 80%, 10% Oregon No, 20%, 60%, 20% No, 20%, 60%, 20% Pennsylvania Specialty Regulation NA Rhode Island NA Gross receipts or NA South Carolina Gross receipts or I-533

I-534 Specialized Industry Formulas (Part 3) (continued) Legend: NA Not applicable NR Not reported Service Business Retailers Broadcasting South Dakota South Dakota does not impose a corporate income tax............................................................... Tennessee Texas Gross receipts NA Gross receipts NA Gross receipts NA Utah Vermont Virginia Washington Washington does not impose a corporate income tax................................................................ West Virginia ; Rule Tax 2.39 Wisconsin ; Rule Tax 2.39 Wyoming Wyoming does not impose a corporate income tax..................................................................