Current through Register Vol. 42, No. 11, August 30, 2024
(a)
Payroll Factor: In General.
(1) The payroll
factor is a fraction, the numerator of which is the total amount paid in this
state during the tax period by the taxpayer for compensation in the production
of business income, and the denominator of which is the total compensation paid
for the production of business income everywhere during the tax
period.
(2) The total amount "paid"
to employees is determined upon the basis of the taxpayer's accounting method.
If the taxpayer has adopted the accrual method of accounting, all compensation
properly accrued shall be deemed to have been paid. Notwithstanding the
taxpayer's method of accounting, compensation paid to employees may, at the
election of the taxpayer, be included in the payroll factor by use of the cash
method if the taxpayer is required to report such compensation under that
method for unemployment compensation purposes.
The payroll factor includes only compensation which is
attributable to the business income subject to apportionment. The compensation
of any employee on account of activities which are connected with the
production of nonbusiness income shall be excluded from the factor.
(i) EXAMPLE: The taxpayer uses some of its
employees in the construction of a storage building which, upon completion, is
used in the regular course of the taxpayer's trade or business. The wages paid
to those employees are treated as a capital expenditure by the taxpayer. The
amount of those wages is included in the payroll factor.
(ii) EXAMPLE: The taxpayer owns various
securities from which nonbusiness income is derived. The management of the
taxpayer's investment portfolio is the only duty of Mr. X, an employee. The
salary paid to Mr. X is excluded from the payroll factor.
(3) The term "compensation" means wages,
salaries, commissions and any other form of remuneration paid to employees for
personal services. Payments made to an independent contractor or any other
person not properly classifiable as an employee are excluded. Only amounts paid
directly to employees are included in the payroll factor. Amounts considered
paid directly include the value of board, rent, housing, lodging, and other
benefits or services furnished to employees by the taxpayer in return for
personal services provided that such amounts constitute income to the recipient
under the federal Internal Revenue Code. In the case of employees not subject
to the federal Internal Revenue Code, e.g., those employed in foreign
countries, the determination of whether such benefits or services would
constitute income to the employees shall be made as though such employees were
subject to the federal Internal Revenue Code.
(4) The term "employee" means (A) any officer
of a corporation, or (B) any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the status of
an employee. Generally, a person will be considered to be an employee if he is
included by the taxpayer as an employee for purposes of the payroll taxes
imposed by the Federal Insurance Contributions Act; except that, since certain
individuals are included within the term "employees" in the Federal Insurance
Contributions Act who would not be employees under the usual common-law rules,
it may be established that a person who is included as an employee for purposes
of the Federal Insurance Contributions Act is not an employee for purposes of
this regulation.
(5) Year to year
consistency. In filing returns with this state, if the taxpayer departs from or
modifies the treatment of compensation paid used in returns for prior years,
the taxpayer shall disclose in the return for the current year the nature and
extent of the modification.
(6)
State to state consistency. If the returns or reports filed by the taxpayer
with all states to which the taxpayer reports under Article IV of the
Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act
are not uniform in the treatment of compensation paid, the taxpayer shall
disclose in its return to this State the nature and extent of the
variance.
(b) Payroll
Factor: Denominator. The denominator of the payroll factor is the total
compensation paid for the production of business income everywhere during the
tax period. Accordingly, compensation paid to employees whose services are
performed entirely in a state where the taxpayer is exempt from taxation, for
example, by Public Law 86-272, is included in the denominator of the payroll
factor.
EXAMPLE: A taxpayer has employees in its state of legal
domicile (State A) and is taxable in State B. In addition the taxpayer has
other employees whose services are performed entirely in State C where the
taxpayer is exempt from taxation under the provisions of Public Law 86-272. As
to these latter employees, the compensation will be assigned to State C where
their services are performed (i.e., included in the denominator but not the
numerator of the payroll factor) even though the taxpayer is not taxable in
State C.
(c) Payroll
Factor: Numerator. The numerator of the payroll factor is the total amount paid
in this state during the tax period by the taxpayer for compensation in the
production of business income. The tests in Section
40-27-1,
Article IV.14 to be applied in determining whether compensation is paid in this
state are derived from the Model Unemployment Compensation Act. Accordingly, if
compensation paid to employees is included in the payroll factor by use of the
cash method of accounting or if the taxpayer is required to report such
compensation under that method for unemployment compensation purposes, it shall
be presumed that the total wages reported by the taxpayer to this state for
unemployment compensation purposes constitute compensation paid in this state
except for compensation excluded under Regulation 810-27-1-4-.13(a) to
810-27-1-4-.14.
The presumption may be overcome by satisfactory evidence that an employee's
compensation is not properly reportable to this state for unemployment
compensation purposes.
(d) Payroll
Factor: Under the Completed Contract Method of Accounting. For taxpayers
utilizing the completed contract method of accounting, the payroll factor shall
include all payroll costs attributed to the contracts completed during the tax
period. Payroll costs not directly attributed to the completed contract
projects, such as administrative salaries, shall be reported as otherwise
provided in this regulation.
Author: Peter M. Petrillo, Jr.
