Current through Register Vol. 43, No. 02, November 27, 2024
(1) In General.
Section 40-27-1, Article IV.17 provides
for the inclusion in the numerator of the sales factor of gross receipts from
transactions other than sales of tangible personal property (including
transactions with the United States Government); under this section, (gross
receipts are attributed to this state if the income producing activity which
gave rise to the receipts is performed wholly within this state. Also, gross
receipts are attributed to this state if, with respect to a particular item of
income, the income producing activity is performed within and without this
state but the greater proportion of the income producing activity is performed
in this state, based on costs of performance.
(2) Income Producing Activity: Defined. The
term "income producing activity" means the act or acts directly engaged in by
the taxpayer for the ultimate purpose of obtaining gains or profit. Such
activity does not include transactions and activities performed on behalf of a
taxpayer, such as those conducted on its behalf by an independent contractor.
Accordingly, income producing activity includes but is not limited to the
following:
(a) The rendering of personal
services by employees or the utilization of tangible and intangible property by
the taxpayer in performing a service.
(b) The sale, rental, leasing, licensing or
other use of real property.
(c) The
rental, leasing, licensing or other use of tangible personal
property.
(d) The sale, licensing
or other use of intangible personal property.
(3) Income Producing Activity: Business
Situs. The income producing activity is deemed performed at the situs of real,
tangible and intangible personal property or the place where personal services
are rendered. The situs of real and tangible personal property is the
commercial domicile of the taxpayer unless the property has acquired a
"business situs" elsewhere. "Business situs" is I. the place at which
intangible personal property is employed as capital; or II. the place where the
property is located if possession and control of the property as localized in
connection with a trade or business so that substantial use or value attaches
to the property. This rule shall not apply to the performance of construction
contracts.
EXAMPLE: Taxpayer, a corporation whose principal business
activity as the manufacture and sale of hot water heaters pledges bonds in this
State as security for the payment of taxes incurred or to be incurred in
connection with its business activities in this state. The property has a
business situs in this state; therefore, interest income derived from such
bonds is attributable to this state.
(4) Costs of Performance: Defined. The term
"costs of performance" means direct costs determined in a manner consistent
with generally accepted accounting principles and in accordance with accepted
conditions or practices in the trade or business of the taxpayer.
(5) Application.
(a) In General. Receipts (other than from
sales of tangible personal property) which do not constitute a principal source
of business income and which such receipts are included in the denominator of
the receipts factor are in this state if:
1.
the income producing activity is performed wholly within this state; or
2. the income producing activity
is performed both in and outside this state and a greater proportion of the
income producing activity is performed in this state than in any other state,
based on costs of performance.
(i) EXAMPLE:
The taxpayer is engaged in the heavy construction business in which it uses
cranes, tractors, and earth-moving vehicles. The taxpayer makes short-term
rentals of the equipment when not needed on any project. The taxpayer rented
some of the equipment to A for three weeks. The equipment was used by A for two
weeks in this state and one week in State X. The taxpayer's direct costs in
connection with the equipment during the rental period was $500 each week.
Accordingly, the greater proportion of such costs was incurred in this state.
All of the rental receipts are business income and for purposes of the sales
factor are included in the numerator for this state.
(ii) EXAMPLE: Taxpayer, whose commercial
domicile is in this state, manufactures and sells industrial chemicals.
Taxpayer owns patents on certain of its products. The taxpayer licensed the
production of the chemicals in foreign countries in return for which the
taxpayer receives royalties which constitute a relatively minor amount of its
income. Royalties are business income and for purposes of the sales factor
included in the numerator for the state of the taxpayer's commercial
domicile.
(b)
Special Rules. The following are special rules for determining when receipts
from the income producing activities described below which constitute a
principal source of business income are in this state:
1. Gross receipts from the sale, lease,
rental or licensing of real property are in this state if the real property is
located in this State.
2. Gross
receipts from the rental, lease, or licensing the use of or other use of
tangible personal property are in this state if the property is located in this
state during the entire period of rental, lease, license or other use. If the
property is within and without this state during the rental, lease or licensing
period, gross receipts attributable to this state shall be measured by the
ratio which the time the property was physically present or was used in this
state bears to the total time or use of the property everywhere during that
period.
(i) EXAMPLE: Taxpayer is the owner of
10 railroad cars. During the year, the total of the days during which each
railroad car was present in this state was 50 days. The receipts attributable
to the use of each of the railroad cars in this state are a separate item of
income and shall be determined as follows:
(10 x 50) = 500 x Total Receipts = Receipts Attributable
to
3650 this state
3. Gross receipts for the performance of
personal services are attributable to this state to the extent that such
services are performed in this state. If services are performed partly within
and partly without this state, the gross receipts from the performance of such
services shall be attributable to this state based upon the ratio which the
time spent in performing the services in this state bears to the total time
spent in performing the services everywhere. Time spent in performing services
includes the amount of time expended in the performance of a contract or other
obligation which gives rise to such gross receipts. Personal service not
directly connected with the performance of the contract or other obligation, as
for example time expended in negotiating the contract, is excluded from the
computations.
(i) EXAMPLE: Taxpayer, a road
show, gave theatrical performances at various locations in State X and in this
state during the tax period. All gross receipts from performances given in this
state are attributed to this state.
(ii) EXAMPLE: The taxpayer, a public opinion
survey corporation, conducted a poll by means of its employees in State X and
in this state for the sum of $9,000. The project required 600 man-hours to
obtain the basic data and prepare the survey report. Two hundred of the 600 man
hours were expended in this state. The receipts attributable to this state are
$3,000.
200 man hours x $9,000 = $3,000
600 man hours
4. Gross receipts from intangible personal
property shall be attributed to this state based upon the ratio which the total
property and payroll factors in this state bears to the total of the property
and payroll factors everywhere for the tax period.
5. The provisions of this paragraph shall
apply to sales other than sales of tangible personal property to the United
States Government.
6. The
provisions of this regulation shall not apply for taxpayers whose taxable year
begins on or after December 31, 2010
Author: Dennice Hillard
Statutory Authority:
Code of Ala.
1975, §§
40-2A-7(a) (5),
40-18-57.
