Current through Register Vol. 50, No. 9, March 1, 2024
RELATES TO:
KRS
141.010,
141.040,
141.0401,
141.120,
141.121,
141.205,
141.206,
141.901
NECESSITY, FUNCTION, AND CONFORMITY:
KRS
131.130(1) authorizes the
Department of Revenue to promulgate administrative regulations to administer
and enforce Kentucky's tax laws.
KRS
141.120(9) requires that all
apportionable income of multi-state corporations be apportioned to Kentucky by
multiplying the income by a fraction.
KRS
141.120(11)(d) authorizes
the department to promulgate administrative regulations providing how to
determine the receipts factor used in the multi-state apportionable income
apportionment formula.
KRS
141.120(12)(b) authorizes
the department to promulgate administrative regulations for determining
alternative allocation and apportionment methods for taxpayers engaged in
particular industries.
KRS
141.121 requires the department to promulgate
administrative regulations for sourcing receipts of public service corporations
and financial organizations, and to detail the sourcing of receipts related to
financial institutions. This administrative regulation provides guidance for
determining the receipts factor of a multi-state corporation.
Section 1. Definitions.
(1) "Advertising services" means an agreement
to include the broadcast customer's advertising content in the broadcaster's
film programming.
(2) "Affiliated
airline" is defined by
KRS
141.121(1)(a).
(3) "Apportionable income" is defined by
KRS
141.120(1)(a).
(4) "Barrel mile" means the transportation of
one (1) barrel of liquid or gas one (1) mile.
(5) "Billing address" means the location
indicated in the books and records of the taxpayer as the primary mailing
address relating to a customer's account that at the time of the transaction is
kept in good faith in the normal course of business, and not for tax avoidance
purposes.
(6) "Borrower or credit
card holder located in this state" means:
(a)
A borrower, other than a credit card holder, that is engaged in a trade or
business which maintains its commercial domicile in this state; or
(b) A borrower that is not engaged in a trade
or business or a credit card holder whose billing address is in this
state.
(7) "Broadcast
customer" means a person, corporation, partnership, limited liability company,
or other entity, such as an advertiser or a platform distribution company, that
has a direct connection or contractual relationship with the broadcaster under
which revenue is derived by a broadcaster.
(8) "Broadcaster" means a taxpayer that is a
television broadcast network, a cable program network, or a television
distribution company. The term "broadcaster" does not include a platform
distribution company.
(9) "Business
customer" means a customer that is a business operating in any form, including
a sole proprietorship. Sales to a non-profit organization, to a trust, to the
U.S. Government, to a foreign, state, or local government, or to an agency or
instrumentality of that government are treated as sales to a business customer
and are assigned consistent with the rules for those sales.
(10) "Card issuer's reimbursement fee" means
the fee a taxpayer receives from a merchant's bank because one (1) of the
persons to whom the taxpayer has issued a credit, debit, or similar type of
card has charged merchandise or services to the card.
(11) "Code" means the Internal Revenue Code
as defined by
KRS
141.010(21).
(12) "Commercial domicile" is defined by
KRS
141.120(1)(b).
(13) "Credit card" means a card, or other
means of providing information, that entitles the holder to charge the cost of
purchases, or a cash advance, against a line of credit.
(14) "Debit card" means a card, or other
means of providing information, that enables the holder to charge the cost of
purchases, or a cash withdrawal, against the holder's bank account or a
remaining balance on the card.
(15)
"Delivered to a location" means to the location of the taxpayer's market for
the service, which may not be the location of the taxpayer's employees or
property.
(16) "Film programming"
means one (1) or more performances, events, or productions (or segments of
performances, events, or productions) intended to be distributed for visual and
auditory perception, including items such as news, entertainment, sporting
events, plays, stories, or other literary, commercial, educational, or artistic
works.
(17) "Financial institution"
is defined by
KRS
141.010(17).
(18) "Financial organization" is defined by
KRS
141.120(1)(c), and includes:
(a) Any corporation or other business entity
registered under state law as a bank holding company or registered under the
12
U.S.C. 1841, et. seq., Federal Bank Holding
Company Act of 1956, as amended; or
(b) Registered as a savings and loan holding
company under the
12
U.S.C. 1701 to
1750, Federal
National Housing Act, as amended; and
(c) Any entity more than fifty (50) percent
owned, directly or indirectly, by these holding companies.
(19) "Individual customer" means a customer
that is not a business customer.
(20) "In-person services" means services that
are physically provided in person by the taxpayer, if the customer or
customer's real or tangible property upon which the services are performed is
in the same location as the service provider when the services are performed.
In-person services includes situations when a third-party contractor provides
the services on behalf of the taxpayer.
(21) "Intangible property" means property
that is not physical or whose representation by physical means is merely
incidental. Examples of intangible property include:
(a) Agreements not to compete;
(b) Brand names;
(c) Computer software;
(d) Contract rights, including broadcasting
rights;
(e) Copyrights;
(f) Designs;
(g) Formulae;
(h) Goodwill and going concern
value;
(i) Ideas;
(j) Information;
(k) Know-how;
(l) Licenses;
(m) Literary, musical, or artistic
composition;
(n) Methods;
(o) Patents;
(p) Procedures;
(q) Processes;
(r) Programs;
(s) Securities;
(t) Systems;
(u) Technical data;
(v) Trade dress;
(w) Trademarks;
(x) Trade names; and
(y) Trade secrets.
(22) "Internal Revenue Code" is defined by
KRS
141.010(21).
(23) "Kentucky revenue passenger miles" is
defined by
KRS
141.121(1)(c).
(24) "Loan" means any extension of credit
resulting from direct negotiations between the taxpayer and its customer, or
the purchase, in whole or in part, of this extension of credit from another.
Loans include participations, syndications, and leases treated as loans for
federal income tax purposes. Loans do not include:
(a) Assets held in a trading
account;
(b) Cash items in the
process of collection;
(c) Credit
card receivables, including purchased credit card relationships;
(d) Federal funds sold;
(e) Futures or forwards contracts;
(f) Non-interest bearing balances due from
depository institutions;
(g)
Notional principal contracts such as swaps;
(h) Options;
(i) Securities, interests in a REMIC, or
other mortgage-backed or asset-backed security;
(j) Securities purchased under agreements to
resell; and
(k) Other similar
items.
(25) "Loan secured
by real property" means that fifty (50) percent or more of the aggregate value
of the collateral used to secure a loan or other obligation, when valued at
fair market value as of the time the original loan or obligation was incurred,
was real property.
(26) "Merchant
discount" means the fee (or negotiated discount) charged to a merchant by the
taxpayer for the privilege of participating in a program when a credit, debit,
or similar type of card is accepted in payment for merchandise or services sold
to the card holder, net of any cardholder charge-back and unreduced by any
interchange transaction or issuer reimbursement fee paid to another for charges
or purchases made its cardholder.
(27) "Miles operated" means the movement of a
barge, tug, or other watercraft one (1) mile.
(28) "Non-apportionable income" is defined by
KRS
141.120(1)(d).
(29) "Participation" means an extension of
credit in which an undivided ownership interest is held on a pro rata basis in
a single loan or pool of loans and related collateral. In a loan participation,
the credit originator initially makes the loan and then subsequently resells
all or a portion of it to other lenders. The participation may or may not be
known to the borrower.
(30)
"Passenger airline" is defined by
KRS
141.121(1)(d).
(31) "Place of order" means the physical
location from which a customer places an order for a sale other than a sale of
tangible personal property from a taxpayer, resulting in a contract with the
taxpayer.
(32) "Platform
distribution company" means a cable service provider, a direct broadcast
satellite system, an Internet content distributor, or any distributor that
directly charges viewers for access to any film programming.
(33) "Population" means the most recent
population data maintained by the U.S. Census Bureau for the year in question
as of the close of the taxable period.
(34) "Provider" is defined by
KRS
141.121(1)(e).
(35) "Public service company" is defined by
KRS
141.0401(6)(a)9.
(36) "Qualified air freight forwarder" is
defined by
KRS
141.121(1)(f).
(37) "Receipts" is defined by
KRS
141.120(1)(e).
(38) "Regular place of business" means an
office at which the taxpayer carries on its business in a regular and
systematic manner and which is continuously maintained, occupied, and used by
employees of the taxpayer.
(39)
"Related member" is defined by
KRS
141.205(1)(g).
(40) "Revenue car mile" means the movement of
a loaded railroad car one (1) mile.
(41) "Revenue passenger miles" is defined by
KRS
141.121(1)(g).
(42) "State" is defined by
KRS
141.010(34).
(43) "State where a contract of sale is
principally managed by the customer" means the primary location at which an
employee or other representative of a customer serves as the primary contact
person for the taxpayer with respect to the day-to-day execution and
performance of a contract entered into by the taxpayer with the
customer.
(44) "Syndication" means
an extension of credit in which two (2) or more persons fund and each person is
at risk only up to a specified percentage of the total extension of credit or
up to a specified dollar amount.
Section 2. Additional Principles.
(1) Year to year consistency. If the taxpayer
departs from or modifies the basis for excluding or including gross receipts in
the receipts factor used in returns for prior years, the taxpayer shall
disclose in the return for the current year the nature and extent of the
modification.
(2) State to state
consistency. If the returns or reports filed by the taxpayer with all states to
which the taxpayer reports are not uniform in the inclusion or exclusion of
gross receipts, the taxpayer shall disclose in its Kentucky return the nature
and extent of the variance.
(3)
Denominator. The denominator of the receipts factor shall include the gross
receipts that are received from transactions and activity in the regular course
of the taxpayer's trade or business, except gross receipts excluded under this
administrative regulation.
(4)
Numerator. The numerator of the receipts factor shall include gross receipts
attributable to this state that are received by the taxpayer from transactions
and activity in the regular course of the taxpayer's trade or business, except
gross receipts excluded under this administrative regulation.
Section 3. Sales of Tangible
Personal Property in This State.
(1) Gross
receipts from sales of tangible personal property (except sales to the United
States Government) are in this state if the property is delivered or shipped to
a purchaser within this state regardless of the f.o.b. point or other
conditions of sale.
(2) Property
shall be determined as delivered or shipped to a purchaser within this state if
the recipient is located in this state, even though the property is ordered
from outside this state. Example. The taxpayer, with inventory in State A, sold
$100,000 of its products to a purchaser having branch stores in several states,
including Kentucky. The order for the purchase was placed by the purchaser's
central purchasing department located in State B. $25,000 of the purchase order
was shipped directly to purchaser's branch store in Kentucky. The branch store
in Kentucky is the purchaser with respect to $25,000 of the taxpayer's
sales.
(3) Property is delivered or
shipped to a purchaser within this state if the shipment terminates in this
state, even though the property is subsequently transferred by the purchaser to
another state. Example. The taxpayer makes a sale to a purchaser who maintains
a central warehouse in Kentucky at which all merchandise purchases are
received. The purchaser reships the goods to its branch stores in other states
for sale. All of the taxpayer's products shipped to the purchaser's warehouse
in Kentucky constitute property delivered or shipped to a purchaser within
Kentucky.
(4) A purchaser within
this state shall include the ultimate recipient of the property if the taxpayer
in this state, at the designation of the purchaser, delivers to or has the
property shipped to the ultimate recipient within this state. Example. A
taxpayer in Kentucky sold merchandise to a purchaser in State A. Taxpayer
directed the manufacturer or supplier of the merchandise in State B to ship the
merchandise to the purchaser's customer in Kentucky pursuant to purchaser's
instructions. The sale by the taxpayer is in Kentucky.
(5) If property shipped by a seller from the
state of origin to a consignee in another state is diverted while en route to a
purchaser in this state, the sales are in this state. Example. The taxpayer, a
produce grower in State A, begins shipment of perishable produce to the
purchaser's place of business in State B. While en route, the produce is
diverted to the purchaser's place of business in Kentucky where the taxpayer is
subject to tax. The sale by the taxpayer is attributed to Kentucky.
Section 4. Sales of Tangible
Personal Property to the United States Government. Gross receipts from sales of
tangible personal property to the United States Government are in this state if
the property is shipped from an office, store, warehouse, factory, or other
place of storage in this state. For the purposes of this administrative
regulation, only sales for which the United States Government makes direct
payment to the seller pursuant to the terms of a contract constitute sales to
the United States Government. Sales by a subcontractor to the prime contractor,
the party to the contract with the United States Government, do not constitute
sales to the United States Government.
(1)
Example. A taxpayer contracts with General Services Administration to deliver X
number of trucks which were paid for by the United States Government. The sale
is a sale to the United States Government.
(2) Example. The taxpayer, as a subcontractor
to a prime contractor with the National Aeronautics and Space Administration,
contracts to build a component of a rocket for $1,000,000. The sale by the
subcontractor to the prime contractor is not a sale to the United States
Government.
Section 5.
Sales Other Than Sales of Tangible Personal Property: General Rules.
(1) Market-Based Sourcing. Receipts from
sales other than sales of tangible personal property shall be in this state if
the taxpayer's market for the sales is in this state. The provisions in this
section establish rules for:
(a) Determining
whether and to what extent the market for a sale other than the sale of
tangible personal property is in this state;
(b) Reasonably approximating the state or
states of assignment if the state or states cannot be determined; and
(c)
1.
Excluding receipts from the sale of intangible property from the numerator and
denominator of the receipts factor pursuant to
KRS
141.120(11)(a)4.b.iii.;
2. Excluding receipts from the denominator of
the receipts factor, pursuant to
KRS
141.120(11)(c) if the state
or states of assignment cannot be determined or reasonably approximated;
or
3. Excluding receipts from the
denominator of the receipts factor, pursuant to
KRS
141.120(11)(c) if the
taxpayer is not taxable in the state to which the receipts are assigned as
determined under
KRS
141.120(3).
(2) General Principles of
Application; Contemporaneous Records. A taxpayer's assignment of receipts from
sales other than sales of tangible personal property shall be consistent with
the following principles:
(a)
1. A taxpayer shall apply the rules set forth
in this administrative regulation based on objective criteria and shall
consider all sources of information reasonably available to the taxpayer upon
its tax filing, including items such as the taxpayer's books and records kept
in the normal course of business;
2. A taxpayer shall determine its method of
assigning receipts in good faith, and apply it consistently with respect to
similar transactions year to year; and
3. A taxpayer shall retain contemporaneous
records that explain the determination and application of its method of
assigning its receipts, including its underlying assumptions, and shall provide
those records to the department upon request.
(b) This administrative regulation provides
various assignment rules that apply sequentially in a hierarchy. For each sale
to which a hierarchical rule applies, a taxpayer shall make an effort to apply
the primary rule applicable to the sale before seeking to apply the next rule
in the hierarchy (and shall continue to do so with each succeeding rule in the
hierarchy, if applicable). For example, in some cases, the applicable rule
first requires a taxpayer to determine the state or states of assignment, and
if the taxpayer cannot do so, the rule requires the taxpayer to reasonably
approximate the state or states. In these cases, the taxpayer shall attempt to
determine the state or states of assignment (i.e., apply the primary rule in
the hierarchy) in good faith and with reasonable effort before it may
reasonably approximate the state or states.
(c) A taxpayer's method of assigning its
receipts, including the use of a method of approximation, if applicable, shall
reflect an attempt to obtain the most accurate assignment of receipts
consistent with this administrative regulation, rather than an attempt to lower
the taxpayer's tax liability. A method of assignment that is reasonable for one
(1) taxpayer may not necessarily be reasonable for another taxpayer, depending
upon the applicable facts.
(3) Rules of Reasonable Approximation.
(a) This administrative regulation
establishes rules for determining whether and to what extent the market for a
sale other than the sale of tangible personal property is in this state. The
administrative regulation sets forth rules of reasonable approximation, which
shall apply if the state or states of assignment cannot be determined. In some
instances, the reasonable approximation shall be made in accordance with
specific rules of approximation prescribed in this administrative regulation.
In other cases, the applicable rule in this administrative regulation permits a
taxpayer to reasonably approximate the state or states of assignment, using a
method that reflects an effort to approximate the results that may be obtained
under the applicable rules or standards set forth in this administrative
regulation.
(b) Approximation Based
Upon Known Sales.
1. If applying the
applicable rules set forth in subsections (7), (8), (9), and (10) of this
section, a taxpayer may ascertain the state or states of assignment of a
substantial portion of its receipts from sales of substantially similar
services ("assigned receipts"), but not all of those sales; and
2. If the taxpayer reasonably believes, based
on all available information, that the geographic distribution of some or all
of the remainder of those sales generally tracks that of the assigned receipts,
it shall include receipts from those sales which it believes tracks the
geographic distribution of the assigned receipts in its receipts factor in the
same proportion as its assigned receipts. This rule applies in the context of
licenses and sales of intangible property if the substance of the transaction
resembles a sale of goods or services.
(c) Related Member Transactions. Information
Imputed from Customer to Taxpayer. If a taxpayer has receipts subject to this
administrative regulation from transactions with a related member customer,
information that the customer has that is relevant to the sourcing of receipts
from these transactions is imputed to the taxpayer.
(4) Rules with Respect to Exclusion of
Receipts from the Receipts Factor.
(a) The
receipts factor only includes those amounts defined as receipts.
(b) Certain receipts arising from the sale of
intangibles are excluded from the numerator and denominator of the sales factor
pursuant to
KRS
141.120(11)(a)4.b.iii..
(c) If a taxpayer cannot ascertain the state
or states to which receipts of a sale are to be assigned pursuant to the
applicable rules set forth in this administrative regulation, including through
the use of a method of reasonable approximation, if relevant, using a
reasonable amount of effort undertaken in good faith, the receipts shall be
excluded from the denominator of the taxpayer's receipts factor pursuant to
KRS
141.120(11)(c).
(d) If a taxpayer assigns receipts to a state
or states in which they are not taxable, those receipts shall be excluded from
the denominator of the taxpayer's receipts factor pursuant to
KRS
141.120(11)(c).
(e) Receipts of a taxpayer from hedging
transactions, or from the maturity, redemption, sale, exchange, loan, or other
disposition of cash or securities, shall be excluded pursuant to
KRS
141.120(1)(e).
(f) Nothing in the provisions adopted here
pursuant to
KRS
141.120 is intended to limit the application
of
KRS
141.120(12) or the authority
granted to the department under
KRS
141.120(12).
(5) Sale, Rental, Lease, or License of Real
Property. In the case of a sale, rental, lease, or license of real property,
the receipts from the sale shall be in this state if and to the extent that the
property is in this state.
(6)
Rental, Lease, or License of Tangible Personal Property. In the case of a
rental, lease, or license of tangible personal property, the receipts from the
sale shall be in this state if and to the extent that the property is in this
state. If property is mobile property that is located both within and without
this state during the period of the lease or other contract, the receipts
assigned to this state are the receipts from the contract period multiplied by
the fraction computed under
103 KAR
16:290 (as adjusted, if necessary, to reflect
differences between usage during the contract period and usage during the
taxable year).
(7) Sale of a
Service.
(a) General Rule. The receipts from
a sale of a service shall be in this state if and to the extent that the
service is delivered to a location in this state. The rules to determine the
location of the delivery of a service in the context of several specific types
of service transactions shall be set forth in this subsection and in
subsections (8), (9), and (10) of this section.
(b) In-Person Services.
1. Examples of in-person services include
services such as:
a. Warranty and repair
services;
b. Cleaning
services;
c. Plumbing
services;
d. Carpentry;
e. Construction contractor
services;
f. Pest
control;
g. Landscape
services;
h. Medical and dental
services, including medical testing, x-rays and mental health care and
treatment;
i. Child care;
j. Hair cutting and salon services;
k. Live entertainment and athletic
performances; and
l. In-person
training or lessons.
2.
In-person services shall include services as described in subparagraph 1.,
clauses a. through l. of this paragraph that are performed:
a. At a location that is owned or operated by
the service provider; or
b. A
location of the customer, including the location of the customer's real or
tangible personal property.
3. Various professional services, including
services such as accounting, financial and consulting services, and other
similar services are not treated as in-person services within the meaning of
this paragraph, although they may involve some amount of in-person
contact.
4. Assignment of Receipts.
Rule of Determination. Except as provided in this subparagraph, if the service
provided by the taxpayer is an in-person service, the service is delivered to
the location where the service is received. Therefore, the receipts from a sale
shall be in this state if and to the extent the customer receives the in-person
service in this state. In assigning its receipts from sales of in-person
services, a taxpayer shall first attempt to determine the location where a
service is received, as follows:
a. If the
service is performed with respect to the body of an individual customer in this
state (e.g., hair cutting or x-ray services) or in the physical presence of the
customer in this state (e.g., live entertainment or athletic performances), the
service is received in this state.
b. If the service is performed with respect
to the customer's real estate in this state or if the service is performed with
respect to the customer's tangible personal property at the customer's
residence or in the customer's possession in this state, the service is
received in this state.
c. If the
service is performed with respect to the customer's tangible personal property
and the tangible personal property is to be shipped or delivered to the
customer, whether the service is performed within or outside this state, the
service is received in this state if the property is shipped or delivered to
the customer in this state.
5. Rule of Reasonable Approximation. If the
state or states where a service is actually received cannot be determined, but
the taxpayer has sufficient information regarding the place of receipt from
which it may reasonably approximate the state or states where the service is
received, the taxpayer shall reasonably approximate the state or states. If the
state to which the receipts are to be assigned may be determined or reasonably
approximated, but the taxpayer is not taxable in that state, the receipts that
may be assigned to the state shall be excluded from the denominator of the
taxpayer's receipts factor pursuant to
KRS
141.120(11)(c).
6. Examples. In these examples assume, unless
otherwise stated, that the taxpayer is taxable in each state to which its
receipts may be assigned, so that there is no requirement that the receipts
from the sale or sales be eliminated from the denominator of the taxpayer's
receipts factor. For purposes of the examples, it is irrelevant whether the
services are performed by an employee of the taxpayer, or by an independent
contractor acting on the taxpayer's behalf.
a.
Example. Salon Corp has retail locations in Kentucky and in other states where
it provides hair cutting services to individual and business customers, the
latter of whom are paid for through the means of a company account. The
receipts from sales of services provided at Salon Corp's in-state locations
shall be in Kentucky. The receipts from sales of services provided at Salon
Corp's locations outside Kentucky, even if provided to residents of Kentucky,
are not receipts from in-state sales.
b. Example. Landscape Corp provides
landscaping and gardening services in Kentucky and in neighboring states.
Landscape Corp provides landscaping services at the in-state vacation home of
an individual who is a resident of another state and who is located outside
Kentucky when the services are performed. The receipts from sale of services
provided at the in-state location shall be in Kentucky.
c. Example. Same facts as in Example b.,
except that Landscape Corp provides the landscaping services to Retail Corp, a
corporation with retail locations in several states, and the services are with
respect to those locations of Retail Corp that are in Kentucky and in other
states. The receipts from the sale of services provided to Retail Corp shall be
in Kentucky to the extent the services are provided in Kentucky.
d. Example. Camera Corp provides camera
repair services at a Kentucky retail location to walk-in individual and
business customers. In some cases, Camera Corp actually repairs a camera that
is brought to its in-state location at a facility that is in another state. In
these cases, the repaired camera is then returned to the customer at Camera
Corp's Kentucky location. The receipts from sale of these services shall be in
Kentucky.
e. Example. Same facts as
in Example d., except that a customer located in Kentucky mails the camera
directly to the out-of-state facility owned by Camera Corp to be fixed, and
receives the repaired camera back in Kentucky by mail. The receipts from sale
of the service shall be in Kentucky.
f. Example. Teaching Corp provides seminars
in Kentucky to individual and business customers. The seminars and the
materials used in connection with the seminars are prepared outside the state.
The teachers who teach the seminars include teachers that are residents outside
the state, and the students who attend the seminars include students that are
residents outside the state. Because the seminars are taught in Kentucky, the
receipts from sales of the services shall be in Kentucky.
(8) Services Delivered
to the Customer, or on Behalf of the Customer, or Delivered Electronically
Through the Customer.
(a) If the service
provided by the taxpayer is not an in-person service within the meaning of
subsection (7)(b) of this section, or a professional service within the meaning
of subsection (10) of this section, and the service is delivered to or on
behalf of the customer, or delivered electronically through the customer, the
receipts from a sale are in this state if and to the extent that the service is
delivered in this state. For the purposes of this subsection and subsection (9)
of this section, a service that is delivered "to" a customer is a service in
which the customer and not a third party is the recipient of the service. A
service that is delivered "on behalf of" a customer is one in which a customer
contracts for a service, but one (1) or more third parties, rather than the
customer, is the recipient of the service, such as fulfillment services, or the
direct or indirect delivery of advertising to the customer's intended audience.
A service may be delivered to or on behalf of a customer by physical means or
through electronic transmission. A service that is delivered electronically
"through" a customer is a service that is delivered electronically to a
customer for purposes of resale and subsequent electronic delivery in
substantially identical form to an end user or other third-party
recipient.
(b) Assignment of
Receipts. The assignment of receipts to a state or states in the instance of a
sale of a service that is delivered to the customer or on behalf of the
customer, or delivered electronically through the customer, depends upon the
method of delivery of the service and the nature of the customer. Separate
rules of assignment apply to services delivered by physical means and services
delivered by electronic transmission. For purposes of this subsection, a
service delivered by an electronic transmission is not a delivery by a physical
means. If a rule of assignment set forth in this administrative regulation
depends on whether the customer is an individual or a business customer and the
taxpayer acting in good faith cannot reasonably determine whether the customer
is an individual or business customer, the taxpayer shall treat the customer as
a business customer. If the state to which the receipts from a sale are to be
assigned may be determined or reasonably approximated, but the taxpayer is not
taxable in that state, the receipts that may be assigned to that state shall be
excluded from the denominator of the taxpayer's receipts factor.
1. Delivery to or on Behalf of a Customer by
Physical Means Whether to an Individual or Business Customer. Examples of
services delivered to a customer or on behalf of a customer through a physical
means include services such as:
a. Product
delivery services if property is delivered to the customer or to a third party
on behalf of the customer;
b. The
delivery of brochures, fliers, or other direct mail services;
c. The delivery of advertising or
advertising-related services to the customer's intended audience in the form of
a physical medium; and
d. The sale
of custom software if the taxpayer installs the custom software at the
customer's site (e.g., if software is developed for a specific customer in a
case when the transaction is properly treated as a service transaction for
purposes of corporate taxation). The rules in this administrative regulation
apply whether the taxpayer's customer is an individual customer or a business
customer.
2. Rule of
Determination. In assigning the receipts from a sale of a service delivered to
a customer or on behalf of a customer through a physical means, a taxpayer
shall first attempt to determine the state or states where the service is
delivered. If the taxpayer is able to determine the state or states where the
service is delivered, it shall assign the receipts to that state or
states.
3. Rule of Reasonable
Approximation. If the taxpayer cannot determine the state or states where the
service is actually delivered, but has sufficient information regarding the
place of delivery from which it may reasonably approximate the state or states
where the service is delivered, it shall reasonably approximate the state or
states.
4. Examples. In these
examples assume, unless otherwise stated, that the taxpayer is taxable in each
state to which its receipts may be assigned, so that there is no requirement in
these examples that the receipts shall be eliminated from the denominator of
the taxpayer's receipts factor.
a. Example.
Direct Mail Corp, a corporation based outside Kentucky, provides direct mail
services to its customer, Business Corp. Business Corp contracts with Direct
Mail Corp to deliver printed fliers to a list of customers that is provided to
it by Business Corp. Some of Business Corp's customers are in Kentucky and some
of those customers are in other states. Direct Mail Corp will use the postal
service to deliver the printed fliers to Business Corp's customers. The
receipts from the sale of Direct Mail Corp's services to Business Corp shall be
assigned to Kentucky to the extent that the services are delivered on behalf of
Business Corp to Kentucky customers (i.e., to the extent that the fliers are
delivered on behalf of Business Corp to Business Corp's intended audience in
Kentucky).
b. Example. Ad Corp is a
corporation based outside Kentucky that provides advertising and
advertising-related services in Kentucky and in neighboring states. Ad Corp
enters into a contract at a location outside Kentucky with an individual
customer who is not a Kentucky resident to design advertisements for billboards
to be displayed in Kentucky, and to design fliers to be mailed to Kentucky
residents. All of the design work is performed outside Kentucky. The receipts
from the sale of the design services shall be in Kentucky because the service
is physically delivered on behalf of the customer to the customer's intended
audience in Kentucky.
c. Example.
Same facts as Example b., except that the contract is with a business customer
that is based outside Kentucky. The receipts from the sale of the design
services shall be in Kentucky because the services are physically delivered on
behalf of the customer to the customer's intended audience in
Kentucky.
d. Example. Fulfillment
Corp, a corporation based outside Kentucky, provides product delivery
fulfillment services in Kentucky and in neighboring states to Sales Corp, a
corporation located outside Kentucky that sells tangible personal property
through a mail order catalog and over the Internet to customers. In some cases
if a customer purchases tangible personal property from Sales Corp to be
delivered in Kentucky, Fulfillment Corp will, pursuant to its contract with
Sales Corp, deliver that property from its fulfillment warehouse located
outside Kentucky. The receipts from the sale of the fulfillment services of
Fulfillment Corp to Sales Corp shall be assigned to Kentucky to the extent that
Fulfillment Corp's deliveries on behalf of Sales Corp are to recipients in
Kentucky.
e. Example. Software
Corp, a software development corporation, enters into a contract with a
business customer, Buyer Corp, which is physically located in Kentucky, to
develop custom software to be used in Buyer Corp's business. Software Corp
develops the custom software outside Kentucky, and then physically installs the
software on Buyer Corp's computer hardware located in Kentucky. The development
and sale of the custom software is properly characterized as a service
transaction, and the receipts from the sale shall be assigned to Kentucky
because the software is physically delivered to the customer in
Kentucky.
f. Example. Same facts as
Example e., except that Buyer Corp has offices in Kentucky and several other
states, but is commercially domiciled outside Kentucky and orders the software
from a location outside Kentucky. The receipts from the development and sale of
the custom software service shall be assigned to Kentucky because the software
is physically delivered to the customer in Kentucky.
(9) Delivery to a
Customer by Electronic Transmission. Services delivered by electronic
transmission shall include services such as those that are transmitted through
the means of wire, lines, cable, fiber optics, electronic signals, satellite
transmission, audio or radio waves, or other similar means, whether or not the
service provider owns, leases or controls the transmission equipment. In the
case of the delivery of a service by electronic transmission to a customer, the
following rules shall apply:
(a) Services
Delivered By Electronic Transmission to an Individual Customer or Business
Customer:
1. Services Delivered By Electronic
Transmission to an Individual Customer.
a.
Rule of Determination. In the case of the delivery of a service to an
individual customer by electronic transmission, the service shall be delivered
in this state if and to the extent the taxpayer's customer receives the service
in this state. If the taxpayer may determine the state or states where the
service is received, it shall assign the receipts from that sale to that state
or states.
b. Rules of Reasonable
Approximation. If the taxpayer cannot determine the state or states where the
customer actually receives the service, but has sufficient information
regarding the place of receipt from which it may reasonably approximate the
state or states where the service is received, it shall reasonably approximate
the state or states. If a taxpayer does not have sufficient information from
which it may determine or reasonably approximate the state or states in which
the service is received, it shall reasonably approximate the state or states
using the customer's billing address.
2. Services Delivered By Electronic
Transmission to a Business Customer.
a. Rule
of Determination. In the case of the delivery of a service to a business
customer by electronic transmission, the service shall be delivered in this
state if and to the extent that the taxpayer's customer receives the service in
this state. If the taxpayer may determine the state or states where the service
is received, it shall assign the receipts from that sale to the state or
states. For purposes of paragraph (b)2. of this subsection, the state or states
where the service is received shall reflect the location at which the service
is directly used by the employees or designees of the customer.
b. Rule of Reasonable Approximation. If the
taxpayer cannot determine the state or states where the customer actually
receives the service, but has sufficient information regarding the place of
receipt from which it may reasonably approximate the state or states where the
service is received, it shall reasonably approximate the state or
states.
c. Secondary Rule of
Reasonable Approximation. In the case of the delivery of a service to a
business customer by electronic transmission, if a taxpayer does not have
sufficient information from which it may determine or reasonably approximate
the state or states in which the service is received, the taxpayer shall
reasonably approximate the state or states as set forth in this administrative
regulation. In these cases, unless the taxpayer may apply the safe harbor set
forth in this subsection the taxpayer shall reasonably approximate the state or
states in which the service is received as follows:
(i) By assigning the receipts from the sale
to the state where the contract of sale is principally managed by the
customer;
(ii) If the state where
the customer principally manages the contract is not reasonably determinable,
by assigning the receipts from the sale to the customer's place of order;
and
(iii) If the customer's place
of order is not reasonably determinable, by assigning the receipts from the
sale using the customer's billing address except if the taxpayer derives more
than five (5) percent of its receipts from sales of services from any single
customer, then the taxpayer shall identify the state in which the contract of
sale is principally managed by that customer.
d. Safe Harbor. In the case of the delivery
of a service to a business customer by electronic transmission, a taxpayer may
not be able to determine or reasonably approximate the state or states in which
the service is received. In these cases, the taxpayer may, in lieu of the rule
stated in paragraph (a)2.c. of this subsection, apply the safe harbor stated in
this clause. Under this safe harbor, a taxpayer may assign its receipts from
sales to a particular customer based upon the customer's billing address in a
taxable year in which the taxpayer:
(i)
Engages in substantially similar service transactions with more than 250
customers, whether business or individual; and
(ii) Does not derive more than five (5)
percent of its receipts from sales of all services from that customer. This
safe harbor applies only for purposes of services delivered by electronic
transmission to a business customer.
e. Related Member Transactions. In the case
of a sale of a service by electronic transmission to a business customer that
is a related member, the taxpayer may not use the secondary rule of reasonable
approximation in subclause (iii) of clause c. within this subparagraph. The
taxpayer may use the rule of reasonable approximation and the safe harbor
provided by this administrative regulation only if the department may aggregate
sales to related members in determining whether the sales exceed five (5)
percent of receipts from sales of all services under that safe harbor provision
if necessary or appropriate to prevent distortion.
f. Examples. In these examples, unless
otherwise stated, assume that the taxpayer is not related to the customer to
which the service is delivered. Assume that the taxpayer is taxable in each
state to which its receipts may be assigned, so that there is no requirement in
these examples that the receipts shall be eliminated from the denominator of
the taxpayer's receipts factor. Further, assume if relevant, unless otherwise
stated, that the safe harbor set forth in clause d. of this subparagraph does
not apply.
(i) Example. Support Corp, a
corporation that is based outside Kentucky, provides software support and
diagnostic services to individual and business customers that have previously
purchased certain software from third-party vendors. These individual and
business customers are located in Kentucky and other states. Support Corp
supplies its services on a case-by-case basis if directly contacted by its
customer. Support Corp generally provides these services through the Internet,
but sometimes provides these services by phone. In all cases, Support Corp
verifies the customer's account information before providing any service. Using
the information that Support Corp verifies before performing a service, Support
Corp may determine where its services are received, and therefore shall assign
its receipts to these locations. The receipts from sales made to Support Corp's
individual and business customers shall be in Kentucky to the extent that
Support Corp's services are received in Kentucky.
(ii) Example. Online Corp, a corporation
based outside Kentucky, provides Web-based services through the means of the
Internet to individual customers who are residents in Kentucky and in other
states. These customers access Online Corp's Web services primarily in their
states of residence, and sometimes, while traveling, in other states. For a
substantial portion of its receipts from the sale of services, Online Corp may
either determine the state or states where the services are received, or, if it
cannot determine the state or states, it has sufficient information regarding
the place of receipt to reasonably approximate the state or states. However,
Online Corp cannot determine or reasonably approximate the state or states of
receipt for all of the sales of its services. Assuming that Online Corp
reasonably believes, based on all available information, that the geographic
distribution of the receipts from sales for which it cannot determine or
reasonably approximate the location of the receipt of its services generally
tracks those for which it does have this information, Online Corp shall assign
to Kentucky the receipts from sales for which it does not know the customers'
locations in the same proportion as those receipts for which it has this
information.
(iii) Example. Same
facts as in Example (ii), except that Online Corp reasonably believes that the
geographic distribution of the receipts from sales for which it cannot
determine or reasonably approximate the location of the receipt of its
Web-based services do not generally track the sales for which it does have this
information. Online Corp shall assign the receipts from sales of its services
for which it lacks information as provided to its individual customers using
the customers' billing addresses.
(iv) Example. Same facts as in Example (iii),
except that Online Corp is not taxable in one (1) state to which some of its
receipts from sales may be assigned. The receipts that may be assigned to that
state shall be excluded from the denominator of Online Corp's receipts
factor.
(v) Example. Net Corp, a
corporation based outside Kentucky, provides Web-based services to a business
customer, Business Corp, a company with offices in Kentucky and two (2)
neighboring states. Particular employees of Business Corp access the services
from computers in each Business Corp office. Assume that Net Corp determines
that Business Corp employees in Kentucky were responsible for seventy-five (75)
percent of Business Corp's use of Net Corp's services, and Business Corp
employees in other states were responsible for twenty-five (25) percent of
Business Corp's use of Net Corp's services. Seventy-five (75) percent of the
receipts from the sale are received in Kentucky. Assume alternatively that Net
Corp lacks sufficient information regarding the location or locations where
Business Corp's employees used the services to determine or reasonably
approximate the location or locations. Under these circumstances, if Net Corp
derives five (5) percent or less of its receipts from sales to Business Corp,
Net Corp shall assign the receipts under the secondary rule of approximation to
the state where Business Corp principally managed the contract, or if that
state is not determinable, to the state where Business Corp placed the order
for the services, or if that state is not reasonably determinable, to the state
of Business Corp's billing address. If Net Corp derives more than five (5)
percent of its receipts from sales of services to Business Corp, Net Corp shall
identify the state in which its contract of sale is principally managed by
Business Corp and shall assign the receipts to that state.
(vi) Example. Net Corp, a corporation based
outside Kentucky, provides Web-based services through the means of the Internet
to more than 250 individual and business customers in Kentucky and in other
states. Assume that for each customer Net Corp cannot determine the state or
states where its Web services are actually received, and lacks sufficient
information regarding the place of receipt to reasonably approximate the state
or states. Assume that Net Corp does not derive more than five (5) percent of
its receipts from sales of services to a single customer. Net Corp may apply
the safe harbor, and may assign its receipts using each customer's billing
address. If Net Corp is not taxable in one (1) or more states to which some of
its receipts may be assigned, it shall exclude those receipts from the
denominator of its receipts factor.
(b) Services Delivered Electronically Through
or "on Behalf of" an Individual or Business Customer. A service delivered
electronically "on behalf of" the customer is one in which a customer contracts
for a service to be delivered electronically, but one (1) or more third
parties, rather than the customer, is the recipient of the service, such as the
direct or indirect delivery of advertising on behalf of a customer to the
customer's intended audience. A service delivered electronically "through" a
customer to third-party recipients is a service that is delivered
electronically to a customer for purposes of resale and subsequent electronic
delivery in substantially identical form to end users or other third-party
recipients.
1. Rule of Determination. In the
case of the delivery of a service by electronic transmission, if the service is
delivered electronically to end users or other third-party recipients through
or on behalf of the customer, the service is delivered in this state if and to
the extent that the end users or other third-party recipients are in this
state. For example, in the case of the direct or indirect delivery of
advertising on behalf of a customer to the customer's intended audience by
electronic means, the service shall be delivered in this state to the extent
that the audience for the advertising is in this state. In the case of the
delivery of a service to a customer that acts as an intermediary in reselling
the service in substantially identical form to third-party recipients, the
service shall be delivered in this state to the extent that the end users or
other third-party recipients receive the services in this state. These rules
apply if the taxpayer's customer is an individual customer or a business
customer and if the end users or other third-party recipients to which the
services are delivered through or on behalf of the customer are individuals or
businesses.
2. Rule of Reasonable
Approximation. If the taxpayer cannot determine the state or states where the
services are actually delivered to the end users or other third-party
recipients either through or on behalf of the customer, but has sufficient
information regarding the place of delivery from which it may reasonably
approximate the state or states where the services are delivered, it shall
reasonably approximate the state or states.
3. Select Secondary Rules of Reasonable
Approximation.
a. If a taxpayer's service is
the direct or indirect electronic delivery of advertising on behalf of its
customer to the customer's intended audience, and if the taxpayer lacks
sufficient information regarding the location of the audience from which it may
determine or approximate that location, the taxpayer shall approximate the
audience in a state for the advertising using the following secondary rules of
reasonable approximation. If a taxpayer is delivering advertising directly or
indirectly to a known list of subscribers, the taxpayer shall approximate the
audience for advertising in a state using a percentage that reflects the ratio
of the state's subscribers in the specific geographic area in which the
advertising is delivered relative to the total subscribers in that area. For a
taxpayer with less information about its audience, the taxpayer shall
approximate the audience in a state using the percentage that reflects the
ratio of the state's population in the specific geographic area in which the
advertising is delivered relative to the total population in that
area.
b. The taxpayer shall
approximate the extent to which the service is received in a state by using the
percentage that reflects the ratio of the state's population in the specific
geographic area in which the taxpayer's intermediary resells the services,
relative to the total population in that area:
(i) If a taxpayer's service is the delivery
of a service to a customer that then acts as the taxpayer's intermediary in
reselling that service to end users or other third party recipients;
or
(ii) If the taxpayer lacks
sufficient information regarding the location of the end users or other third
party recipients from which it may determine or reasonably approximate that
location.
c. Examples.
Assume in each of these examples that the taxpayer that provides the service is
taxable in this state and shall apportion its income pursuant to
KRS
141.120.
(i) Example: Web Corp, a corporation that is
based outside Kentucky, provides Internet content to viewers in Kentucky and
other states. Web Corp sells advertising space to business customers pursuant
to which the customers' advertisements shall appear in connection with Web
Corp's Internet content. Web Corp receives a fee for running the advertisements
that is determined by reference to the number of times the advertisement is
viewed or clicked upon by the viewers of its Web site. Web Corp's sale of
advertising space to its business customers shall be assigned to Kentucky to
the extent that the viewers of the Internet content are in Kentucky, as
measured by viewings or clicks. If Web Corp is unable to determine the actual
location of its viewers, and lacks sufficient information regarding the
location of its viewers to reasonably approximate the location, Web Corp shall
approximate the amount of its Kentucky sales by multiplying the amount of the
sales by a percentage that reflects the Kentucky population in the specific
geographic area in which the content containing the advertising is delivered
relative to the total population in the area.
(ii) Example. Retail Corp, a corporation that
is based outside of Kentucky, sells tangible property through its retail stores
located in Kentucky and other states, and through a mail order catalog. Answer
Co, a corporation that operates call centers in multiple states, contracts with
Retail Corp to answer telephone calls from individuals placing orders for
products found in Retail Corp's catalogs. The phone answering services of
Answer Co are being delivered to Retail Corp's customers and prospective
customers. Therefore, Answer Co is delivering a service electronically to
Retail Corp's customers or prospective customers on behalf of Retail Corp, and
shall assign the proceeds from this service to the state or states from which
the phone calls are placed by the customers or prospective customers. If Answer
Co cannot determine the actual locations from which phone calls are placed, and
lacks sufficient information regarding the locations to reasonably approximate
the locations, Answer Co shall approximate the amount of its Kentucky sales by
multiplying the amount of its fee from Retail Corp by a percentage that
reflects the Kentucky population in the specific geographic area from which the
calls are placed relative to the total population in the area.
(iii) Example. Web Corp, a corporation that
is based outside of Kentucky, sells tangible property to customers via its
Internet website. Design Co designed and maintains Web Corp's website,
including making changes to the site based on customer feedback received
through the site. Design Co's services are delivered to Web Corp, the proceeds
from which shall be assigned pursuant to this subsection. The fact that Web
Corp's customers and prospective customers incidentally benefit from Design
Co's services, and may even interact with Design Co in the course of providing
feedback, does not transform the service into one delivered "on behalf of" Web
Corp to Web Corp's customers and prospective customers.
(iv) Example. Wholesale Corp, a corporation
that is based outside Kentucky, develops an Internet-based information database
outside Kentucky and enters into a contract with Retail Corp under which Retail
Corp will market and sell access to this database to end users. Depending on
the facts, the provision of database access may be either the sale of a service
or the license of intangible property, or may have elements of both. Assume
that on the particular facts applicable in this example, Wholesale Corp is
selling database access in transactions properly characterized as involving the
performance of a service. If an end user purchases access to Wholesale Corp's
database from Retail Corp, Retail Corp in turn compensates Wholesale Corp in
connection with that transaction. Wholesale Corp's services are being delivered
through Retail Corp to the end user. Wholesale Corp shall assign its sales to
Retail Corp to the state or states in which the end users receive access to
Wholesale Corp's database. If Wholesale Corp cannot determine the state or
states where the end users actually receive access to Wholesale Corp's
database, and lacks sufficient information regarding the location from which
the end users access the database to reasonably approximate the location,
Wholesale Corp shall approximate the extent to which its services are received
by end users in Kentucky. Wholesale Corp shall approximate by using a
percentage that reflects the ratio of the Kentucky population in the specific
geographic area in which Retail Corp regularly markets and sells Wholesale
Corp's database relative to the total population in the area. It does not
matter for purposes of the analysis whether Wholesale Corp's sale of database
access constitutes a service or a license of intangible property, or some
combination of both.
(10) Professional Services.
(a) Except as provided in this subsection,
professional services are services that require specialized knowledge, and in
some cases, require a professional certification, license, or degree. These
services include the performance of technical services that require the
application of specialized knowledge. Professional services shall include
services such as:
1. Management
services;
2. Bank and financial
services;
3. Financial custodial
services;
4. Investment and
brokerage services;
5. Fiduciary
services;
6. Tax
preparation;
7. Payroll and
accounting services;
8. Lending
services;
9. Credit card services
(including credit card processing services);
10. Data processing services;
11. Legal services;
12. Consulting services;
13. Video production services;
14. Graphic and other design
services;
15. Engineering services;
and
16. Architectural
services.
(b) Overlap
with Other Categories of Services.
1. Certain
services that are under "professional services" as set forth in paragraph (a)1.
through 16. of this subsection are nevertheless treated as "in-person
services", and shall be assigned under the rules of subsection (7)(b) of this
section. Professional services that are physically provided in person by the
taxpayer such as carpentry, certain medical and dental services, or child care
services, if the customer or the customer's real or tangible property upon
which the services are provided is in the same location as the service provider
when the services are performed, are "in-person services". In-person services
are assigned as these, but may be considered to be "professional services."
However, professional services, if the service is of an intellectual or
intangible nature, such as legal, accounting, financial, and consulting
services shall be assigned as professional services under the rules of this
subsection, notwithstanding the fact that these services may involve some
amount of in-person contact.
2.
Professional services may include the transmission of one (1) or more documents
or other communications by mail or by electronic means. In some cases, all or
most communications between the service provider and the service recipient may
be by mail or by electronic means. However, despite this transmission, the
assignment rules that apply shall be those set forth in this subsection and not
those set forth in subsection (8) of this section pertaining to services
delivered to a customer or through or on behalf of a customer.
(c) Assignment of Receipts. In the
case of a professional service, it is generally possible to characterize the
location of delivery in multiple ways by emphasizing different elements of the
service provided, no one (1) of which shall consistently represent the market
for the services. Therefore, the location of delivery in the case of
professional services is not susceptible to a general rule of determination,
and shall be reasonably approximated. The assignment of receipts from a sale of
a professional service depends in many cases upon whether the customer is an
individual or business customer. In any instance in which the taxpayer, acting
in good faith, cannot reasonably determine whether the customer is an
individual or business customer, the taxpayer shall treat the customer as a
business customer. For purposes of assigning the receipts from a sale of a
professional service, a taxpayer's customer shall be the person that contracts
for the service, irrespective of whether another person pays for or benefits
from the taxpayer's services. If the taxpayer is not taxable in the state to
which receipts from a sale is assigned, the receipts are excluded from the
denominator of the taxpayer's receipts factor pursuant to
KRS
141.120(11)(c).
1. General Rule. Receipts from sales of
professional services shall be assigned in accordance with this section, other
than those services described in:
a.
Subparagraph 2. of this paragraph on architectural and engineering
services;
b. Subparagraph 3. of
this paragraph on transactions with related members.
c. Professional Services Delivered to
Individual Customers. Except as provided in this subsection, in any instance in
which the service provided is a professional service and the taxpayer's
customer is an individual customer, the state or states in which the service is
delivered shall be reasonably approximated as set forth in this subsection. The
taxpayer shall assign the receipts from a sale to the customer's state of
primary residence, or, if the taxpayer cannot reasonably identify the
customer's state of primary residence, to the state of the customer's billing
address. Except in any instance in which the taxpayer derives more than five
(5) percent of its receipts from sales of all services from an individual
customer, the taxpayer shall identify the customer's state of primary residence
and shall assign the receipts from the service or services provided to that
customer to that state.
d.
Professional Services Delivered to Business Customers. Except as provided in
this subsection, in any instance in which the service provided is a
professional service and the taxpayer's customer is a business customer, the
state or states in which the service is delivered shall be reasonably
approximated as set forth in this section. Unless the taxpayer may use the safe
harbor set forth in clause e. of this subparagraph, the taxpayer shall assign
the receipts from the sale as follows:
(i) By
assigning the receipts to the state where the contract of sale is principally
managed by the customer;
(ii) If
the place of customer management is not reasonably determinable, to the
customer's place of order; and
(iii) If the customer's place of order is not
reasonably determinable, to the customer's billing address. Except in any
instance in which the taxpayer derives more than five (5) percent of its
receipts from sales of all services from a customer, the taxpayer shall
identify the state in which the contract of sale is principally managed by the
customer.
e. Safe Harbor;
Large Volume of Transactions. Except as provided in the rules set forth in
clauses c. and d. of this subparagraph, a taxpayer may assign its receipts from
sales to a particular customer based on the customer's billing address in any
taxable year in which the taxpayer engages in substantially similar service
transactions with more than 250 customers, whether individual or business, and
does not derive more than five (5) percent of its receipts from sales of all
services from that customer. This safe harbor applies only for purposes of
clause c. of this subparagraph.
2. Architectural and Engineering Services
with respect to Real or Tangible Personal Property. Architectural and
engineering services with respect to real or tangible personal property are
professional services within the meaning of this subsection. However, unlike in
the case of the general rule that applies to professional services:
a. The receipts from a sale of an
architectural service shall be assigned to a state or states if the services
are with respect to real estate improvements located, or expected to be
located, in the state or states; and
b. The receipts from a sale of an engineering
service shall be assigned to a state or states if the services are with respect
to tangible or real property located in the state or states, including real
estate improvements located in, or expected to be located in, the state or
states. These rules shall apply if the customer is an individual or business
customer. In any instance in which architectural or engineering services are
not described in this subparagraph, the receipts from a sale of these services
shall be assigned under the general rule for professional services.
3. Related Member Transactions. In
any instance in which the professional service is sold to a related member,
rather than applying the rule for professional services delivered to business
customers in paragraph (c)1.d. of this subsection, the state or states to which
the service shall be assigned is the place of receipt by the related member as
reasonably approximated using the following hierarchy:
a. If the service primarily relates to
specific operations or activities of a related member conducted in one (1) or
more locations, then to the state or states in which those operations or
activities are conducted in proportion to the related member's payroll at the
locations to which the service relates in the state or states; or
b. If the service does not relate primarily
to operations or activities of a related member conducted in particular
locations, but instead relates to the operations of the related member
generally, then to the state or states in which the related member has
employees, in proportion to the related member's payroll in those states. The
taxpayer may use the safe harbor provided by this administrative regulation
only if the department may aggregate the receipts from sales to related members
in applying the five (5) percent rule if necessary or appropriate to avoid
distortion.
4. Broadcast
Advertising Services. Notwithstanding anything contained in this administrative
regulation to the contrary, receipts from a broadcaster's sale of advertising
services to a broadcast customer shall be assigned to this state if the
commercial domicile of the broadcast customer is in this state.
5. Examples. Unless otherwise stated, assume
in each of these examples, if relevant, that the taxpayer is taxable in each
state to which its receipts may be assigned, so that there is no requirement in
the examples that the receipts shall be excluded from the denominator of the
taxpayer's receipts factor. Assume that the customer is not a related member
and that the safe harbor does not apply.
a.
Example. Broker Corp provides securities brokerage services to individual
customers who are resident in Kentucky and in other states. Assume that Broker
Corp knows the state of primary residence for many of its customers, and if it
does not know this state of primary residence, it knows the customer's billing
address. Assume that Broker Corp does not derive more than five (5) percent of
its receipts from sales of all services from any one (1) individual customer.
If Broker Corp knows its customer's state of primary residence, it shall assign
the receipts to that state. If Broker Corp does not know its customer's state
of primary residence, but rather knows the customer's billing address, it shall
assign the receipts to that state.
b. Example. Same facts as in Example a.,
except that Broker Corp has several individual customers from whom it derives,
in each instance, more than five (5) percent of its receipts from sales of all
services. Receipts from sales to customers from whom Broker Corp derives five
(5) percent or less of its receipts from sales of all services shall be
assigned as described in Example a.. For each customer from whom it derives
more than five (5) percent of its receipts from sales of all services, Broker
Corp shall determine the customer's state of primary residence and shall assign
the receipts from the services provided to that customer to that state. In any
case in which a five (5) percent customer's state of primary residence is
Kentucky, receipts from a sale made to that customer shall be assigned to
Kentucky. In any case in which a five (5) percent customer's state of primary
residence is not Kentucky, receipts from a sale made to that customer shall not
be assigned to Kentucky. If receipts from a sale are assigned to a state other
than Kentucky, if the state of assignment (i.e., the state of primary residence
of the individual customer) is a state in which Broker Corp is not taxable,
receipts from the sales shall be excluded from the denominator of Broker Corp's
receipts factor.
c. Example.
Architecture Corp provides building design services as to buildings located, or
expected to be located, in Kentucky to individual customers who are resident in
Kentucky and other states, and to business customers that are based in Kentucky
and other states. The receipts from Architecture Corp's sales shall be assigned
to Kentucky because the locations of the buildings to which its design services
relate are in Kentucky, or are expected to be in Kentucky. For purposes of
assigning these receipts, it is not relevant where, in the case of an
individual customer, the customer primarily resides or is billed for the
services, and it is not relevant where, in the case of a business customer, the
customer principally manages the contract, placed the order for the services,
or is billed for the services. Further, these receipts shall be assigned to
Kentucky even if Architecture Corp's designs are either physically delivered to
its customer in paper form in a state other than Kentucky or are electronically
delivered to its customer in a state other than Kentucky.
d. Example. Law Corp provides legal services
to individual clients who are residents in Kentucky and in other states. In
some cases, Law Corp may prepare one (1) or more legal documents for its client
as a result of these services or the legal work may be related to litigation or
a legal matter that is ongoing in a state other than where the client is
resident. Assume that Law Corp knows the state of primary residence for many of
its clients, and if it does not know the state of primary residence, it knows
the client's billing address. Assume that Law Corp does not derive more than
five (5) percent of its receipts from sales of all services from any one (1)
individual client. If Law Corp knows its client's state of primary residence,
it shall assign the receipts to that state. If Law Corp does not know its
client's state of primary residence, but rather knows the client's billing
address, it shall assign the receipts to that state. For purposes of the
analysis, it is irrelevant whether the legal documents relating to the service
are mailed or otherwise delivered to a location in another state, or the
litigation or other legal matter that is the underlying predicate for the
services is in another state.
e.
Example. Same facts as in Example d., except that Law Corp provides legal
services to several individual clients who it knows have a primary residence in
a state where Law Corp is not taxable. Receipts from these services shall be
excluded from the denominator of Law Corp's receipts factor even if the billing
address of one (1) or more of these clients is in a state in which Law Corp is
taxable, including Kentucky.
f.
Example. Law Corp provides legal services to several multistate business
clients. In each case, Law Corp knows the state in which the agreement for
legal services that governs the client relationship is principally managed by
the client. In one (1) case, the agreement is principally managed in Kentucky;
in the other cases, the agreement is principally managed in a state other than
Kentucky. If the agreement for legal services is principally managed by the
client in Kentucky the receipts from sale of the services shall be assigned to
Kentucky; in the other cases, the receipts shall not be assigned to Kentucky.
In the case of receipts that shall be assigned to Kentucky, the receipts shall
be assigned even if:
(i) The legal documents
relating to the service are mailed or otherwise delivered to a location in
another state; or
(ii) The
litigation or other legal matter that is the underlying predicate for the
services is in another state.
g. Example. Same facts as in Example f.,
except that Law Corp is not taxable in one (1) of the states other than
Kentucky in which Law Corp's agreement for legal services that governs the
client relationship is principally managed by the business client. Receipts
from these latter services shall be excluded from the denominator of Law Corp's
receipts factor.
h. Example.
Consulting Corp, a company that provides consulting services to law firms and
other customers, is hired by Law Corp in connection with legal representation
that Law Corp provides to Client Co. Specifically, Consulting Corp is hired to
provide expert testimony at a trial being conducted by Law Corp on behalf of
Client Co. Client Co pays for Consulting Corp's services directly. Assuming
that Consulting Corp knows that its agreement with Law Corp is principally
managed by Law Corp in Kentucky, the receipts from the sale of Consulting
Corp's services shall be assigned to Kentucky. It is not relevant for purposes
of the analysis that Client Co is the ultimate beneficiary of Consulting Corp's
services, or that Client Co pays for Consulting Corp's services
directly.
i. Example. Advisor Corp,
a corporation that provides investment advisory services, provides these
advisory services to Investment Co. Investment Co is a multistate business
client of Advisor Corp that uses Advisor Corp's services in connection with
investment accounts that it manages for individual clients, who are the
ultimate beneficiaries of Advisor Corp's services. Assume that Investment Co's
individual clients are persons that are residents in numerous states, which may
or may not include Kentucky. Assuming that Advisor Corp knows that its
agreement with Investment Co is principally managed by Investment Co in
Kentucky, receipts from the sale of Advisor Corp's services shall be assigned
to Kentucky. It is not relevant for purposes of the analysis that the ultimate
beneficiaries of Advisor Corp's services may be Investment Co's clients, who
are residents of numerous states.
j. Example. Advisor Corp provides investment
advisory services to Investment Fund LP, a partnership that invests in
securities and other assets. Assuming that Advisor Corp knows that its
agreement with Investment Fund LP is principally managed by Investment Fund LP
in Kentucky, receipts from the sale of Advisor Corp's services shall be
assigned to Kentucky. It is not relevant for purposes of the analysis that the
partners in Investment Fund LP are residents of numerous states.
k. Example. Design Corp is a corporation
based outside Kentucky that provides graphic design and similar services in
Kentucky and in neighboring states. Design Corp enters into a contract at a
location outside Kentucky with an individual customer to design fliers for the
customer. Assume that Design Corp does not know the individual customer's state
of primary residence and does not derive more than five (5) percent of its
receipts from sales of services from the individual customer. All of the design
work is performed outside Kentucky. Receipts from the sales shall be in
Kentucky if the customer's billing address is in Kentucky.
(11) License, Lease or
Rental of Intangible Property.
(a)
1. The receipts from the license of
intangible property are in this state if the intangible is used in this state.
"Use" is construed to refer to the location of the taxpayer's market for the
use of the intangible property that is being licensed and is not to be
construed to refer to the location of the property or payroll of the taxpayer.
The rules that shall apply to determine the location of the use of intangible
property in the context of several specific types of licensing transactions
shall be set forth in paragraphs (b) through (f) of this subsection. For
purposes of the rules set forth in this subsection, a lease or rental of
intangible property shall be treated the same as a license of intangible
property.
2. A license of
intangible property that conveys all substantial rights in that property shall
be treated as a sale of intangible property for purposes of this administrative
regulation. For purposes of this subsection and subsection (12) of this
section, a sale or exchange of intangible property shall be treated as a
license of that property if the receipts from the sale or exchange are derived
from payments that are contingent on the productivity, use, or disposition of
the property.
3. Intangible
property licensed as part of the sale or lease of tangible property shall be
treated under this section as the sale or lease of tangible property.
4. In any instance in which the taxpayer is
not taxable in the state to which the receipts from the license of intangible
property shall be assigned, the receipts shall be excluded from the denominator
of the taxpayer's receipts factor pursuant to
KRS
141.120(11)(c).
5. Nothing in this administrative regulation
shall be construed to allow or require inclusion of receipts in the receipts
factor that are not included in the definition of "receipts" pursuant to
KRS
141.120(1)(e), or that are
excluded from the numerator and the denominator of the receipts factor pursuant
to
KRS
141.120(11)(a)4.b.(iii). To
the extent that the transfer of either a security or business "goodwill" or
similar intangible value, including, "going concern value" or "workforce in
place," may be characterized as a license or lease of intangible property,
receipts from the transaction shall be excluded from the numerator and the
denominator of the taxpayer's receipts factor.
(b) License of a Marketing Intangible.
1. If a license is granted for the right to
use intangible property in connection with the sale, lease, license, or other
marketing of goods, services, or other items (i.e., a marketing intangible) to
a consumer, the royalties or other licensing fees paid by the licensee for that
marketing intangible shall be assigned to this state to the extent thatthose
fees are attributable to the sale or other provision of goods, services, or
other items purchased or otherwise acquired by consumers or other ultimate
customers in this state.
a. Examples of a
license of a marketing intangible shall include:
(i) The license of a service mark, trademark,
or trade name;
(ii) Certain
copyrights;
(iii) The license of a
film, television or multimedia production or event for commercial distribution;
and
(iv) A franchise
agreement.
b. In each of
these instances, the license of the marketing intangible is intended to promote
consumer sales.
2. In the
case of the license of a marketing intangible, if a taxpayer has actual
evidence of the amount or proportion of its receipts that is attributable to
this state, it shall assign that amount or proportion to this state. In the
absence of actual evidence of the amount or proportion of the licensee's
receipts that are derived from consumers in this state, the portion of the
licensing fee to be assigned to this state shall be reasonably approximated by
multiplying the total fee by a percentage that reflects the ratio of the
population of this state in the specific geographic area in which the licensee
makes material use of the intangible property to regularly market its goods,
services, or other items relative to the total population in that
area.
3. If the license of a
marketing intangible is for the right to use the intangible property in
connection with sales or other transfers at wholesale rather than directly to
retail customers, the portion of the licensing fee to be assigned to this state
shall be reasonably approximated by multiplying the total fee by a percentage
that reflects the ratio of the population of this state in the specific
geographic area in which the licensee's goods, services, or other items are
ultimately and materially marketed using the intangible property relative to
the total population of that area.
4. Unless the taxpayer demonstrates that the
marketing intangible is materially used in the marketing of items outside the
United States, the fees from licensing those marketing intangible shall be
presumed to be derived from within the United States.
(c) License of a Production Intangible.
1. If a license is granted for the right to
use intangible property other than in connection with the sale, lease, license,
or other marketing of goods, services, or other items, and the license is to be
used in a production capacity (a "production intangible"), the licensing fees
paid by the licensee for that right shall be assigned to this state to the
extent that the use for which the fees are paid takes place in this
state.
2. Examples of a license of
a production intangible shall include items such as the license of a patent, a
copyright, or trade secrets to be used in a manufacturing process, if the value
of the intangible lies predominately in its use in that process.
3. In the case of a license of a production
intangible to a member other than a related member, if the location of actual
use is unknown, it shall be presumed that the use of the intangible property
takes place in the state of the licensee's commercial domicile if the licensee
is a business or the licensee's state of primary residence if licensee is an
individual. If the department may reasonably establish that the actual use of
intangible property pursuant to a license of a production intangible takes
place in part in this state, it shall be presumed that the entire use is in
this state, except to the extent that the taxpayer may demonstrate that the
actual location of a portion of the use takes place outside this state. In the
case of a license of a production intangible to a related member, the taxpayer
shall assign the receipts to where the intangible property is actually
used.
(d) License of a
Broadcasting Intangible.
1. If a broadcaster
grants a license to a broadcast customer for the right to use film programming,
the licensing fees paid by the licensee for the right shall be assigned to this
state to the extent that the broadcast customer is located in this
state.
2. In the case of business
customers, the broadcast customer's location shall be determined using the
broadcast customer's commercial domicile.
3. In the case of individual customers, the
broadcast customer's location shall be determined using the address of the
broadcast customer listed in the broadcaster's records.
(e) License of a Mixed Intangible. If a
license of intangible property includes both a license of a marketing
intangible and a license of a production intangible (a "mixed intangible") and
the fees to be paid in each instance are separately and reasonably stated in
the licensing contract, the department shall accept that separate statement for
purposes of this administrative regulation. If a license of intangible property
includes both a license of a marketing intangible and a license of a production
intangible and the fees to be paid in each instance are not separately and
reasonably stated in the contract, it shall be presumed that the licensing fees
are paid entirely for the license of the marketing intangible, except to the
extent that the taxpayer or the department may reasonably establish
otherwise.
(f) License of
Intangible Property if Substance of Transaction Resembles a Sale of Goods or
Services.
1. In some cases, the license of
intangible property will resemble the sale of an electronically delivered good
or service rather than the license of a marketing intangible or a production
intangible. In these cases, the receipts from the licensing transaction shall
be assigned by applying the rules set forth in subsection (9)(a) and (b) of
this section, as if the transaction were a service delivered to an individual
or business customer or delivered electronically through an individual or
business customer, as applicable. Examples of transactions to be assigned under
this subsection shall include transactions such as:
a. The license of database access;
b. The license of access to
information;
c. The license of
digital goods; and
d. The license
of certain software (e.g., if the transaction is not the license of pre-written
software that is treated as the sale of tangible personal property.)
2. Sublicenses. Pursuant to this
paragraph, the rules of subsection (9)(b) of this section may apply if a
taxpayer licenses intangible property to a customer that in turn sublicenses
the intangible property to end users as if the transaction were a service
delivered electronically through a customer to end users. The rules set forth
in subsection (9)(b) of this section that apply to services delivered
electronically to a customer for purposes of resale and subsequent electronic
delivery in substantially identical form to end users or other recipients may
apply with respect to licenses of intangible property for purposes of
sublicense to end users. For this purpose, the intangible property sublicensed
to an end user shall not fail to be substantially identical to the property
that was licensed to the sublicensor merely because the sublicense transfers a
reduced bundle of rights with respect to that property (e.g., because the
sublicensee's rights are limited to its own use of the property and do not
include the ability to grant a further sublicense), or because that property is
bundled with additional services or items of property.
3. Examples. In these examples, unless
otherwise stated, assume that the taxpayer is taxable in each state to which
its receipts may be assigned so that there is no requirement in these examples
that the receipts shall be eliminated from the denominator of the taxpayer's
receipts factor. Assume that the customer is not a related member.
a. Example. Crayon Corp and Dealer Co enter
into a license contract under which Dealer Co as licensee may use trademarks
that are owned by Crayon Corp in connection with Dealer Co's sale of certain
products to retail customers. Under the contract, Dealer Co shall pay Crayon
Corp a licensing fee that is a fixed percentage of the total volume of monthly
sales made by Dealer Co of products using the Crayon Corp trademarks. Under the
contract, Dealer Co may sell the products at multiple store locations,
including store locations that are both within and without Kentucky. Further,
the licensing fees that are paid by Dealer Co are broken out on a per-store
basis. The licensing fees paid to Crayon Corp by Dealer Co shall represent fees
from the license of a marketing intangible. The portion of the fees assigned to
Kentucky shall be determined by multiplying the fees by a percentage that
reflects the ratio of Dealer Co's receipts that are derived from its Kentucky
stores relative to Dealer Co's total receipts.
b. Example. Network Corp is a broadcaster
that licenses rights to its film programming to both platform distribution
companies and individual customers. Platform distribution companies pay
licensing fees to Network Corp for the rights to distribute Network Corp's film
programming to the platform distribution companies' customers. Network Corp's
individual customers pay access fees to Network Corp for the right to directly
access and view Network Corp's film programming. Network Corp's receipts from
each platform distribution company shall be assigned to Kentucky if the
broadcast customer's commercial domicile is in Kentucky. Network Corp's
receipts from each individual broadcast customer shall be assigned to Kentucky
if the address of the broadcast customer listed in the broadcaster's records is
in Kentucky.
c. Example. Moniker
Corp enters into a license contract with Wholesale Co. Pursuant to the
contract, Wholesale Co may use trademarks owned by Moniker Corp to brand sports
equipment that is to be manufactured by Wholesale Co or an unrelated entity,
and to sell the manufactured equipment to unrelated companies that will
ultimately market the equipment to consumers in a specific geographic region,
including a foreign country. The license agreement confers a license of a
marketing intangible, even though the trademarks in question shall be affixed
to property to be manufactured. In addition, the license of the marketing
intangible is for the right to use the intangible property in connection with
sales to be made at wholesale rather than directly to retail customers. The
component of the licensing fee that constitutes the Kentucky receipts of
Moniker Corp shall be determined by multiplying the amount of the fee by a
percentage that reflects the ratio of the Kentucky population in the specific
geographic region relative to the total population in that region. If Moniker
Corp is able to reasonably establish that the marketing intangible was
materially used throughout a foreign country, then the population of that
country shall be included in the population ratio calculation. However, if
Moniker Corp is unable to reasonably establish that the marketing intangible
was materially used in the foreign country in areas outside a particular major
city; then none of the foreign country's population beyond the population of
the major city is included in the population ratio calculation. If Moniker Corp
is not taxable in any state or foreign country in which Wholesale Co's ultimate
consumers are located, the receipts that may be assigned to that state shall be
excluded from the denominator of Moniker Corp's receipts factor.
d. Example. Formula, Inc and Appliance Co
enter into a license contract under which Appliance Co may use a patent owned
by Formula, Inc to manufacture appliances. The license contract specifies that
Appliance Co is to pay Formula, Inc a royalty that is a fixed percentage of the
gross receipts from the products that are later sold. The contract does not
specify other fees. The appliances are both manufactured and sold in Kentucky
and several other states. Assume the licensing fees are paid for the license of
a production intangible, even though the royalty is to be paid based upon the
sales of a manufactured product (i.e., the license is not one that includes a
marketing intangible). Because the department may reasonably establish that the
actual use of the intangible property takes place in part in Kentucky, the
royalty shall be assigned based to the location of that use rather than to
location of the licensee's commercial domicile. It shall be presumed that the
entire use is in Kentucky, except to the extent that the taxpayer may
demonstrate that the actual location of some or all of the use takes place
outside Kentucky. Assuming that Formula, Inc may demonstrate the percentage of
manufacturing that takes place in Kentucky using the patent relative to the
manufacturing in other states, that percentage of the total licensing fee paid
to Formula, Inc under the contract shall constitute Formula, Inc's Kentucky
receipts.
e. Example. Axel Corp
enters into a license agreement with Biker Co in which Biker Co may produce
motor scooters using patented technology owned by Axel Corp and sell the
scooters by marketing the fact that the scooters were manufactured using the
special technology. The contract is a license of both a marketing and
production intangible, i.e., a mixed intangible. The scooters are manufactured
outside Kentucky. Assume that Axel Corp lacks actual information regarding the
proportion of Biker Co's receipts that are derived from Kentucky customers.
Assume that Biker Co is granted the right to sell the scooters in a U.S.
geographic region in which the Kentucky population constitutes twenty-five (25)
percent of the total population during the period in question. The licensing
contract requires an upfront licensing fee to be paid by Biker Co to Axel Corp
and does not specify what percentage of the fee derives from Biker Co's right
to use Axel Corp's patented technology. Because the fees for the license of the
marketing and production intangible are not separately and reasonably stated in
the contract, it shall be presumed that the licensing fees are paid entirely
for the license of a marketing intangible, unless either the taxpayer or the
department reasonably establishes otherwise. Assuming that neither member
establishes otherwise, twenty-five (25) percent of the licensing fee shall
constitute Kentucky receipts.
f.
Example. Same facts as Example e., except that the license contract specifies
separate fees to be paid for the right to produce the motor scooters and for
the right to sell the scooters by marketing the fact that the scooters were
manufactured using the special technology. The licensing contract shall
constitute both the license of a marketing intangible and the license of a
production intangible. Assuming that the separately stated fees are reasonable,
the department shall:
(i) Assign no part of
the licensing fee paid for the production intangible to Kentucky; and
(ii) Assign twenty-five (25) percent of the
licensing fee paid for the marketing intangible to Kentucky.
g. Example. Better Burger Corp,
which is based outside Kentucky, enters into franchise contracts with
franchisees that agree to operate Better Burger restaurants as franchisees in
various states. Several of the Better Burger Corp franchises are in Kentucky.
In each case, the franchise contract between the individual and Better Burger
provides that the franchisee is to pay Better Burger Corp an upfront fee for
the receipt of the franchise and monthly franchise fees, which cover, the right
to use the Better Burger name and service marks, food processes and cooking
know-how, and fees for management services. The upfront fees for the receipt of
the Kentucky franchises shall constitute fees paid for the licensing of a
marketing intangible. These fees shall constitute Kentucky receipts because the
franchises are for the right to make Kentucky sales. The monthly franchise fees
paid by Kentucky franchisees shall constitute fees paid for:
(i) The license of marketing intangibles (the
Better Burger name and service marks);
(ii) The license of production intangibles
(food processes and know-how); and
(iii) Personal services (management
fees).
(iv) The fees paid for the
license of the marketing intangibles and the production intangibles constitute
Kentucky receipts because in each case the use of the intangibles occurs in
Kentucky. The fees paid for the personal services shall be assigned pursuant to
this section.
h. Example.
Online Corp, a corporation based outside Kentucky, licenses an information
database through the means of the Internet to individual customers that are
resident in Kentucky and in other states. These customers access Online Corp's
information database primarily in their states of residence, and sometimes,
while traveling, in other states. The license is a license of intangible
property that resembles a sale of goods or services and shall be assigned in
accordance with this paragraph. If Online Corp may determine or reasonably
approximate the state or states where its database is accessed, it shall do so.
Assuming that Online Corp cannot determine or reasonably approximate the
location where its database is accessed, Online Corp shall assign the receipts
made to the individual customers using the customers' billing addresses to the
extent known. Assume for purposes of this example that Online Corp knows the
billing address for each of its customers. Online Corp's receipts from sales
made to its individual customers shall be in Kentucky if the customer's billing
address is in Kentucky.
i. Example.
Net Corp, a corporation based outside Kentucky, licenses an information
database through the means of the Internet to a business customer, Business
Corp, a company with offices in Kentucky and two (2) neighboring states. The
license is a license of intangible property that resembles a sale of goods or
services and shall be assigned in accordance with this paragraph. Assume that
Net Corp cannot determine where its database is accessed, but reasonably
approximates that seventy-five (75) percent of Business Corp's database access
took place in Kentucky, and twenty-five (25) percent of Business Corp's
database access took place in other states. In that case, seventy-five (75)
percent of the receipts from database access shall be in Kentucky. Assume
alternatively that Net Corp lacks sufficient information regarding the location
where its database is accessed to reasonably approximate the location. Under
these circumstances, if Net Corp derives five (5) percent or less of its
receipts from database access from Business Corp, Net Corp shall assign the
receipts under subsection (9)(a)2. of this section to the state where Business
Corp principally managed the contract, or if that state is not reasonably
determinable to the state where Business Corp placed the order for the
services, or if that state is not reasonably determinable to the state of
Business Corp's billing address. If Net Corp derives more than five (5) percent
of its receipts from database access from Business Corp, Net Corp shall
identify the state in which its contract of sale is principally managed by
Business Corp and shall assign the receipts to that state.
j. Example. Net Corp, a corporation based
outside Kentucky, licenses an information database through the means of the
Internet to more than 250 individual and business customers in Kentucky and in
other states. The license is a license of intangible property that resembles a
sale of goods or services and receipts from that license shall be assigned in
accordance with this paragraph. Assume that Net Corp cannot determine or
reasonably approximate the location where its information database is accessed.
Assume that Net Corp does not derive more than five (5) percent of its receipts
from sales of database access from any single customer. Net Corp may apply the
safe harbor stated in subsection (9)(a)2.d. of this section, and may assign its
receipts to a state or states using each customer's billing address. If Net
Corp is not taxable in one (1) or more states to which some of its receipts may
be otherwise assigned, it shall exclude those receipts from the denominator of
its receipts factor.
k. Example.
Web Corp, a corporation based outside of Kentucky, licenses an Internet-based
information database to business customers who then sublicense the database to
individual end users that are resident in Kentucky and in other states. These
end users access Web Corp's information database primarily in their states of
residence, and sometimes, while traveling, in other states. Web Corp's license
of the database to its customers includes the right to sublicense the database
to end users, while the sublicenses provide that the rights to access and use
the database are limited to the end users' own use and prohibit the individual
end users from further sublicensing the database. Web Corp receives a fee from
each customer based upon the number of sublicenses issued to end users. The
license is a license of intangible property that resembles a sale of goods or
services and shall be assigned by applying the rules set forth in subsection
(9)(b) of this section. If Web Corp may determine or reasonably approximate the
state or states where its database is accessed by end users, it shall do so.
Assuming that Web Corp lacks sufficient information from which it may determine
or reasonably approximate the location where its database is accessed by end
users, Web Corp shall approximate the extent to which its database is accessed
in Kentucky using a percentage that represents the ratio of the Kentucky
population in the specific geographic area in which Web Corp's customer
sublicenses the database access relative to the total population in that
area.
(12) Sale of Intangible Property. Assignment
of Receipts. The assignment of receipts to a state or states in the instance of
a sale or exchange of intangible property depends upon the nature of the
intangible property sold. For purposes of this subsection, a sale or exchange
of intangible property includes a license of that property if the transaction
is treated for tax purposes as a sale of all substantial rights in the property
and the receipts from transaction are not contingent on the productivity, use,
or disposition of the property. For the rules that apply if the consideration
for the transfer of rights is contingent on the productivity, use, or
disposition of the property, see
KRS
141.120(11)(a)4.b.(ii).
(a) Contract Right or Government License that
Authorizes Business Activity in Specific Geographic Area. In the case of a sale
or exchange of intangible property if the property sold or exchanged is a
contract right, government license or similar intangible property that
authorizes the holder to conduct a business activity in a specific geographic
area, the receipts from the sale shall be assigned to a state if and to the
extent that the intangible property is used or may be used within the state. If
the intangible property is used or may be used only in Kentucky, the taxpayer
shall assign the receipts from the sale to this state. If the intangible
property is used or may be used in this state and one (1) or more other states,
the taxpayer shall assign the receipts from the sale to this state to the
extent that the intangible property is used in or authorized for use in this
state, through the means of a reasonable approximation.
(b) Sale that Resembles a License (Receipts
are Contingent on Productivity, Use, or Disposition of the Intangible Property.
In the case of a sale or exchange of intangible property, if the receipts from
the sale or exchange are contingent on the productivity, use, or disposition of
the property, the receipts from the sale shall be assigned by applying the
rules set forth in subsection (11) of this section that establishes rules
pertaining to the license, lease, or rental of intangible property.
(c) Sale that Resembles a Sale of Goods and
Services. In the case of a sale or exchange of intangible property, if the
substance of the transaction resembles a sale of goods or services and if the
receipts from the sale or exchange are not derived from payments contingent on
the productivity, use, or disposition of the property, the receipts from the
sale shall be assigned by applying the rules set forth in subsection (11)(f) of
this section (relating to licenses of intangible property that resemble sales
of goods and services). Examples of these transactions include those that are
analogous to the license transactions cited as examples in subsection (11)(f)3.
of this section.
(d) Excluded
Receipts.
1. Receipts from the sale of
intangible property shall not be included in the receipts factor in any case in
which the sale does not give rise to receipts within the meaning of
KRS
141.120(1)(e). In addition,
pursuant to
KRS
141.120(11)(a)4.b.(iii),
receipts from the sale of intangible property shall be excluded from the
numerator and the denominator of the taxpayer's receipts factor if the receipts
are not referenced in
KRS
141.120(11)(a)4.b.(i) or
KRS
141.120(11)(a)4.b.(ii).
Examples of sales of intangible property that are excluded from the numerator
and denominator of the taxpayer's receipts factor under
KRS
141.120(11)(a)4.b.(iii)
shall include:
a. The sale of a partnership
interest;
b. The sale of business
"goodwill";
c. The sale of an
agreement not to compete; or
d. The
sale of any similar intangible value.
2. If the state to which the receipts from a
sale is to be assigned may be determined or reasonably approximated, but if the
taxpayer is not taxable in the state, the receipts that may be assigned to the
state shall be excluded from the denominator of the taxpayer's receipts
factor.
(e) Examples. In
these examples, unless otherwise stated, assume that the taxpayer is taxable in
each state to which some of its receipts may be assigned, so that there is no
requirement in these examples that the receipts to other states shall be
excluded from the taxpayer's denominator pursuant to paragraph (a)4.b. of this
subsection and
KRS
141.120(11)(c).
1. Example. Airline Corp, a corporation based
outside Kentucky, sells its rights to use several gates at an airport located
in Kentucky to Buyer Corp, a corporation that is based outside Kentucky. The
contract of sale is negotiated and signed outside of Kentucky. The receipts
from the sale shall be in Kentucky because the intangible property sold is a
contract right that authorizes the holder to conduct a business activity solely
in Kentucky.
2.
b. Example. Wireless Corp, a corporation
based outside Kentucky, sells a license issued by the Federal Communications
Commission (FCC) to operate wireless telecommunications services in a
designated area in Kentucky to Buyer Corp, a corporation that is based outside
Kentucky. The contract of sale is negotiated and signed outside of Kentucky.
The receipts from the sale shall be in Kentucky because the intangible property
sold is a government license that authorizes the holder to conduct business
activity solely in Kentucky.
3. Example. Same facts as in Example b.,
except that Wireless Corp sells to Buyer Corp an FCC license to operate
wireless telecommunications services in a designated area in Kentucky and an
adjacent state. Wireless Corp shall attempt to reasonably approximate the
extent to which the intangible property is used in or may be used in Kentucky.
For purposes of making this reasonable approximation, Wireless Corp may rely
upon credible data that identifies the percentage of persons that use wireless
telecommunications in the two (2) states covered by the license.
4. Example. Same facts as in Example c.,
except that Wireless Corp is not taxable in the adjacent state in which the FCC
license authorizes it to operate wireless telecommunications services. The
receipts paid to Wireless Corp that may be assigned to the adjacent state shall
be excluded from the denominator of Wireless Corp's receipts factor.
5. Example. Sports League Corp, a corporation
that is based outside Kentucky, sells the rights to broadcast the sporting
events played by the teams in its league in all fifty (50) U.S. states to
Network Corp. Although the games played by Sports League Corp will be broadcast
in all fifty (50) states, the games are of greater interest in the southeast
region of the country, including Kentucky. Because the intangible property sold
is a contract right that authorizes the holder to conduct a business activity
in a specified geographic area, Sports League Corp shall attempt to reasonably
approximate the extent to which the intangible property is used in or may be
used in Kentucky. For purposes of making this reasonable approximation, Sports
League Corp may rely upon audience measurement information that identifies the
percentage of the audience for its sporting events in Kentucky and the other
states.
6. Example. Same facts as
in Example e., except that Sports League Corp is not taxable in one (1) state.
The receipts paid to Sports League Corp that may be assigned to that state
shall be excluded from the denominator of Sports League Corp's receipts
factor.
7. Example. Inventor Corp,
a corporation that is based outside Kentucky, sells patented technology that it
has developed to Buyer Corp, a business customer that is based in Kentucky.
Assume that the sale is not one in which the receipts derive from payments that
are contingent on the productivity, use, or disposition of the property.
Inventor Corp understands that Buyer Corp is likely to use the patented
technology in Kentucky, but the patented technology may be used anywhere (i.e.,
the rights sold are not rights that authorize the holder to conduct a business
activity in a specific geographic area). The receipts from the sale of the
patented technology shall be excluded from the numerator and denominator of
Inventor Corp's receipts factor.
(13) Special Rules.
(a) Software Transactions. A license or sale
of pre-written software for purposes other than commercial reproduction or
other exploitation of the intellectual property rights that is transferred on a
tangible medium shall be treated as the sale of tangible personal property,
rather than as either the license or sale of intangible property or the
performance of a service. In these cases, the receipts shall be in this state
as determined under the rules for the sale of tangible personal property set
forth under
KRS
141.120(10) and this
administrative regulation. In all other cases, the receipts from a license or
sale of software shall be assigned to this state as determined otherwise under
this administrative regulation. (e.g., depending on the facts, as the
development and sale of custom software, see subsection (8) of this section, as
a license of a marketing intangible, see subsection (11)(b) of this section, as
a license of a production intangible, see subsection (11)(c) of this section,
as a license of intangible property if the substance of the transaction
resembles a sale of goods or services, see subsection (11)(f) of this section,
or as a sale of intangible property, see subsection (12) of this
section.)
(b) Sales or Licenses of
Digital Goods or Services.
1. In the case of a
sale or license of digital goods or services, the receipts from the sale or
license shall be assigned by applying the same rules as are set forth in
subsection (9)(a) and (b) or subsection 10(c)5. of this section, as if the
transaction were a service delivered to an individual or business customer or
delivered through or on behalf of an individual or business customer. Examples
of sales or licenses of digital goods or services include sales of various
video, audio, and software products or other similar transactions. For purposes
of the analysis, it shall not be relevant what the terms of the contractual
relationship are or whether the sale or license might be characterized,
depending upon the particular facts, as, for example, the sale or license of
intangible property or the performance of a service.
2. Providers of communication services, cable
service, and Internet access. Providers shall apportion income to this state
using a three (3) factor formula as provided in
KRS
141.901 pursuant to
KRS
141.121(3).
Section 6. Special
Rules: Receipts Factor. The special sourcing rules established in this section
shall apply to the particular industries, transactions or activities described
in this section for use in computing the fraction for apportioning
apportionable income.
(1) Bargeline.
Bargelines shall determine transportation receipts in this state by multiplying
total transportation revenues by a fraction, the numerator of which shall be
miles operated in this state and the denominator of which shall be total miles
operated for the taxable year. Miles operated in this state shall be fifty (50)
percent of the miles operated on the Ohio River, the Big Sandy River, and the
Mississippi River adjacent to this state's shoreline plus all miles operated on
other inland waterways within this state.
(2) Busline. Buslines shall determine
transportation receipts in this state by multiplying total transportation
revenues by a fraction, the numerator of which shall be miles operated in this
state and the denominator of which shall be total miles operated for the
taxable year.
(3) Financial
institutions and financial organizations.
(a)
Except as otherwise provided, a financial institution or financial organization
whose business activity is taxable both within and without this state shall
allocate and apportion its net income as provided in this section, including, a
financial institution or financial organization organized under the laws of a
foreign country whose effectively connected income as defined under the
Internal Revenue Code is taxable both within this state and within another
state.
(b) Non-apportionable
income. All items of nonapportionable income (income which is not includable in
the apportionable income tax base) shall be allocated pursuant to
KRS
141.120,
141.121,
and
103
KAR 16:060.
(c) Apportionable income. All apportionable
income shall be apportioned to this state in accordance with
KRS
141.121 and this administrative
regulation.
(d) Sourcing of
receipts, generally. The receipts factor is a fraction, the numerator of which
is the receipts of the taxpayer in this state during the taxable year and the
denominator of which is the receipts of the taxpayer within and without this
state during the taxable year. The method for calculating receipts for purposes
of the denominator is the same as the method for determining receipts for
purposes of the numerator. The receipts factor shall include only those
receipts described in this administrative regulation which constitute
apportionable income and are included in the computation of the apportionable
income base for the taxable year.
(e) Receipts from the lease of real property.
The numerator of the receipts factor shall include receipts from the lease or
rental of real property owned by the taxpayer if the property is located within
this state or receipts from the sublease of real property if the property is
located within this state.
1. For this
purpose, "real property owned" means real property:
a. On which the taxpayer may claim
depreciation for federal income tax purposes; or
b. Property to which the taxpayer holds legal
title and on which no other person may claim depreciation for federal income
tax purposes or may claim depreciation if subject to federal income
tax.
2. "Real property
owned" does not include coin, currency, or property acquired in lieu of or
pursuant to a foreclosure.
(f) Receipts from the lease of tangible
personal property. The numerator of the receipts factor shall include receipts
from the lease or rental of tangible personal property owned by the taxpayer if
the property is located within this state or receipts from the sublease of
property if the property is located within this state.
1. For this purpose, "tangible personal
property owned" means tangible personal property:
a. On which the taxpayer may claim
depreciation for federal income tax purposes; or
b. Property to which the taxpayer holds legal
title, and on which no other person may claim depreciation for federal income
tax purposes or may claim depreciation if subject to federal income
tax.
2. "Tangible
personal property owned" does not include coin, currency, or property acquired
in lieu of or pursuant to a foreclosure.
(g) Interest, fees, and penalties imposed in
connection with loans secured by real property.
1. The numerator of the receipts factor shall
include interest, fees, and penalties imposed in connection with loans secured
by real property if the property is located within this state. If the property
is located both within this state and one (1) or more other states, the
receipts described in this paragraph shall be included in the numerator of the
receipts factor if more than fifty (50) percent of the fair market value of the
real property is located within this state. If more than fifty (50) percent of
the fair market value of the real property is not located within any one (1)
state, then the receipts described in this paragraph shall be included in the
numerator of the receipts factor if the borrower is located in this
state.
2. The determination of
whether the real property securing a loan is located within this state shall be
made as of the time the original agreement was made and all subsequent
substitutions of collateral shall be disregarded.
(h) Interest, fees, and penalties imposed in
connection with loans not secured by real property. The numerator of the
receipts factor shall include interest, fees, and penalties imposed in
connection with loans not secured by real property if the borrower is located
in this state.
(i) Net gains from
the sale of loans. The numerator of the receipts factor shall include net gains
from the sale of loans. Net gains from the sale of loans shall include income
recorded under the coupon stripping rules of Section 1286 of the Internal
Revenue Code.
1. The amount of net gains, but
not less than zero, from the sale of loans secured by real property included in
the numerator shall be determined by multiplying these net gains by a fraction.
The numerator of the fraction shall be the amount included in the numerator of
the receipts factor pursuant to paragraph (g) of this subsection and the
denominator shall be the total amount of interest and fees or penalties in the
nature of interest from loans secured by real property.
2. The amount of net gains, but not less than
zero, from the sale of loans not secured by real property included in the
numerator shall be determined by multiplying these net gains by a fraction. The
numerator of the fraction shall be the amount included in the numerator of the
receipts factor pursuant to paragraph (h) of this subsection and the
denominator shall be the total amount of interest and fees or penalties in the
nature of interest from loans not secured by real property.
(j) Receipts from fees, interest,
and penalties charged to card holders. The numerator of the receipts factor
shall include fees, interest, and penalties charged to credit, debit, or
similar card holders, including annual fees and overdraft fees, if the billing
address of the card holder is in this state.
(k) Net gains from the sale of credit card
receivables. The numerator of the receipts factor shall include net gains, but
not less than zero, from the sale of credit card receivables multiplied by a
fraction. The numerator of the fraction shall be the amount included in the
numerator of the receipts factor pursuant to paragraph (j) of this subsection
and the denominator shall be the taxpayer's total amount of interest and fees
or penalties in the nature of interest from credit card receivables and fees
charged to card holders.
(l) Card
issuer's reimbursement fees. The numerator of the receipts factor shall
include:
1. All credit card issuer's
reimbursement fees multiplied by a fraction, the numerator of which is the
amount of fees, interest, and penalties charged to credit card holders included
in the numerator of the receipts factor pursuant to paragraph (j) of this
subsection and the denominator of which is the taxpayer's total amount of fees,
interest, and penalties charged to credit card holders;
2. All debit card issuer's reimbursement fees
multiplied by a fraction, the numerator of which is the amount of fees,
interest, and penalties charged to debit card holders included in the numerator
of the receipts factor pursuant to paragraph (j) of this subsection and the
denominator of which is the taxpayer's total amount of fees, interest, and
penalties charged to debit card holders; and
3. All other card issuer's reimbursement fees
multiplied by a fraction, the numerator of which is the amount of fees,
interest, and penalties charged to all other card holders included in the
numerator of the receipts factor pursuant to paragraph (j) of this subsection
and the denominator of which is the taxpayer's total amount of fees, interest,
and penalties charged to all other card holders.
(m) Receipts from merchant discount.
1. If the taxpayer can readily determine the
location of the merchant and if the merchant is in this state, the numerator of
the receipts factor shall include receipts from merchant discount.
2. If the taxpayer cannot readily determine
the location of the merchant, the numerator of the receipts factor shall
include the receipts from the merchant discount multiplied by a fraction:
a. In the case of a merchant discount related
to the use of a credit card, the numerator of which is the amount of fees,
interest, and penalties charged to credit card holders included in the
numerator of the receipts factor pursuant to paragraph (j) of this subsection
and the denominator of which is the taxpayer's total amount of fees, interest,
and penalties charged to credit card holders;
b. In the case of a merchant discount related
to the use of a debit card, the numerator of which is the amount of fees,
interest, and penalties charged to debit card holders included in the numerator
of the receipts factor pursuant to paragraph (j) of this subsection, and the
denominator of which is the taxpayer's total amount of fees, interest, and
penalties charged to debit card holders; or
c. In the case of a merchant discount related
to the use of all other types of cards, the numerator of which is the amount of
fees, interest, and penalties charged to all other card holders included in the
numerator of the receipts factor pursuant to paragraph (j) of this subsection,
and the denominator of which is the taxpayer's total amount of fees, interest,
and penalties charged to all other card holders.
3. The taxpayer's method for sourcing each
receipt from a merchant discount shall be consistently applied to the receipt
in all states that have adopted sourcing methods substantially similar to
subparagraphs 1. and 2. of this paragraph and shall be used on all subsequent
returns for sourcing receipts from the merchant unless the department permits
or requires application of an alternative method.
(n) Receipts from ATM fees. The receipts
factor shall include all ATM fees that are not forwarded directly to another
bank.
1. The numerator of the receipts factor
shall include fees charged to a cardholder for the use at an ATM of a card
issued by the taxpayer if the cardholder's billing address is in this
state.
2. The numerator of the
receipts factor shall include fees charged to a cardholder, other than the
taxpayer's cardholder, for the use of the card at an ATM owned or rented by the
taxpayer, if the ATM is in this state.
(o) Loan servicing fees.
1.
a. The
numerator of the receipts factor shall include loan servicing fees derived from
loans secured by real property multiplied by a fraction, the numerator of which
is the amount included in the numerator of the receipts factor pursuant to
paragraph (g) of this subsection and the denominator of which is the total
amount of interest and fees or penalties in the nature of interest from loans
secured by real property.
b. The
numerator of the receipts factor shall include loan servicing fees derived from
loans not secured by real property multiplied by a fraction, the numerator of
which is the amount included in the numerator of the receipts factor pursuant
to paragraph (h) of this subsection and the denominator of which is the total
amount of interest and fees or penalties in the nature of interest from loans
not secured by real property.
2. If the taxpayer receives loan servicing
fees for servicing either the secured or the unsecured loans of another, the
numerator of the receipts factor shall include these fees if the borrower is
located in this state.
(p) Receipts from services. The numerator of
the receipts factor shall include receipts from services not otherwise
apportioned under this section, sourced in accordance with Section 5(7), (8),
(9), and (10) of this administrative regulation.
(q) Receipts from investment assets and
activity and trading assets and activity.
1.
Interest, dividends, net gains not less than zero, and other income from
investment assets and activities and from trading assets and activities that
are reported on the taxpayer's financial statements, call reports, or similar
reports shall be included in the receipts factor. Investment assets and
activities and trading assets and activities shall include:
a. Equities;
b. Federal funds;
c. Foreign currency transactions;
d. Forward contracts;
e. Future contracts;
f. Investment securities;
g. Notional principal contracts such as
swaps;
h. Options;
i. Securities purchased and sold under
agreements to resell or repurchase; or
j. Trading account assets.
2. With respect to the investment
and trading assets and activities described in this subparagraph, the receipts
factor shall include:
a. the amount by which
interest from federal funds sold and securities purchased under resale
agreements exceeds interest expense on federal funds purchased and securities
sold under repurchase agreements; and
b. the amount by which interest, dividends,
gains, and other income from trading assets and activities, including assets
and activities in the matched book, in the arbitrage book, and foreign currency
transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of
dividends, and losses from the assets and activities.
3. The numerator of the receipts factor shall
include interest, dividends, net gains not less than zero, and other income
from investment assets and activities and from trading assets and activities
described in subparagraph 1. of this paragraph that are attributable to this
state as follows:
a. The amount of interest,
dividends, net gains not less than zero, and other income from investment
assets and activities in the investment account to be attributed to this state
and included in the numerator shall be determined by multiplying all income
from these assets and activities by a fraction, the numerator of which is the
average value of these assets which are properly assigned to a regular place of
business of the taxpayer within this state, and the denominator of which is the
average value of all these assets.
b. The amount of interest from federal funds
sold and purchased and from securities purchased under resale agreements and
securities sold under repurchase agreements attributable to this state and
included in the numerator shall be determined by multiplying the amount
described in subparagraph 2.a. of this paragraph from these funds and
securities by a fraction, the numerator of which is the average value of
federal funds sold and securities purchased under agreements to resell which
are properly assigned to a regular place of business of the taxpayer within
this state, and the denominator of which is the average value of all these
funds and securities.
c. The amount
of interest, dividends, gains, and other income from trading assets and
activities, including assets and activities in the matched book, in the
arbitrage book and foreign currency transactions, (but excluding amounts
described in clauses a. and b. of this subparagraph ), attributable to this
state and included in the numerator shall be determined by multiplying the
amount described in subparagraph 2.b. of this paragraph by a fraction, the
numerator of which is the average value of these trading assets which are
properly assigned to a regular place of business of the taxpayer within this
state, and the denominator of which is the average value of all these
assets.
d. For purposes of this
subparagraph, average value shall be determined as follows:
(i) Value of property owned by the taxpayer.
The value of real property and tangible personal property owned by the taxpayer
shall be the original cost or other basis of the property for federal income
tax purposes without regard to depletion, depreciation, or
amortization.
(ii) Average value of
property owned by the taxpayer. The average value of property owned by the
taxpayer shall be computed on an annual basis by adding the value of the
property on the first day of the taxable year and the value on the last day of
the taxable year and dividing the sum by two (2). If averaging on this basis
does not properly reflect average value, the department may require averaging
on a more frequent basis. The taxpayer may elect to average on a more frequent
basis. If averaging on a more frequent basis is required by the department or
is elected by the taxpayer, the same method of valuation shall be used
consistently by the taxpayer with respect to property within and without this
state and on all subsequent returns unless the taxpayer receives prior
permission to use an alternative method for determining average value from the
department, or the department requires a different method for determining
average value.
4. In lieu of using the method set forth in
subparagraph 3. of this paragraph, the taxpayer may elect or the department may
require, the use of the method set forth in this subparagraph in order to
allocate and apportion income to fairly represent the extent of a taxpayer's
business activity in this state.
a. The amount
of interest, dividends, net gains not less than zero, and other income from
investment assets and activities in the investment account to be attributed to
this state and included in the numerator shall be determined by multiplying all
income from these assets and activities by a fraction, the numerator of which
is the gross income from these assets and activities which are properly
assigned to a regular place of business of the taxpayer within this state, and
the denominator of which is the gross income from all these assets and
activities.
b. The amount of
interest from federal funds sold and purchased and from securities purchased
under resale agreements and securities sold under repurchase agreements
attributable to this state and included in the numerator shall be determined by
multiplying the amount described in subparagraph 2.a. of this paragraph from
the funds and securities by a fraction, the numerator of which is the gross
income from these funds and the securities which are properly assigned to a
regular place of business of the taxpayer within this state and the denominator
of which is the gross income from all these funds and securities.
c. The amount of interest, dividends, gains,
and other income from trading assets and activities, including assets and
activities in the matched book, in the arbitrage book and foreign currency
transactions, but excluding amounts described in clauses a. and b. of this
subparagraph, attributable to this state and included in the numerator shall be
determined by multiplying the amount described in subparagraph 2.b. of this
paragraph by a fraction, the numerator of which is the gross income from these
trading assets and activities which are properly assigned to a regular place of
business of the taxpayer within this state and the denominator of which is the
gross income from all these assets and activities.
5. If the taxpayer elects or is required by
the department to use the method set forth in subparagraph 4. of this
paragraph, the taxpayer shall use this method on all subsequent returns unless
the taxpayer petitions the department in accordance with
KRS
141.120(12)(b)2. and
receives permission to use a different method on subsequent returns.
6. The taxpayer shall have the burden of
proving that an investment asset or activity or trading asset or activity was
properly assigned to a regular place of business outside of this state by
demonstrating that the day-to-day decisions regarding the asset or activity
occurred at a regular place of business outside this state. If the day-to-day
decisions regarding an investment asset or activity or trading asset or
activity occur at more than one (1) regular place of business and one (1)
regular place of business is in this state and one (1) regular place of
business is outside this state, the asset or activity shall be considered to be
located at the regular place of business of the taxpayer where the investment
or trading policies or guidelines with respect to the asset or activity are
established. Unless the taxpayer demonstrates to the contrary, these policies
and guidelines shall be presumed to be established at the commercial domicile
of the taxpayer.
(r) All
other receipts. The numerator of the receipts factor shall include all other
receipts pursuant to the rules set forth in
KRS
141.120,
141.121,
and this administrative regulation.
(4) Passenger airline. Pursuant to
KRS
141.121(2)(b)1., passenger
airlines shall determine transportation receipts in this state by multiplying
total transportation revenues by a fraction, the numerator of which is Kentucky
revenue passenger miles in this state and the denominator of which is total
revenue passenger miles for the taxable year.
(5) Pipeline. Pipeline companies shall
determine operating receipts in this state by multiplying total operating
revenues by a fraction, the numerator of which is barrel miles transported in
this state and the denominator of which is total barrel miles transported for
the taxable year.
(6) Public
service company. Public service companies shall allocate and apportion net
income in accordance with
KRS
141.121(5) and this
administrative regulation.
(7)
Qualified air freight forwarder. Pursuant to
KRS
141.121(2)(b)2., qualified
air freight forwarders shall determine freight forwarding receipts in this
state by multiplying total freight forwarding revenues by a fraction, the
numerator of which shall be miles operated in this state and the denominator of
which shall be total miles operated by the affiliated airline for the taxable
year.
(8) Railroad. Railroads shall
determine transportation receipts in this state by multiplying total
transportation revenues by a fraction, the numerator of which shall be revenue
car miles in this state and the denominator of which shall be total revenue car
miles for the taxable year.
(9)
Regulated investment company. Regulated investment companies shall apportion
income pursuant to
KRS
141.120 and this administrative regulation,
except that a regulated investment company may elect an alternative method for
determining receipts pursuant to
KRS
141.121(4)(b).
(10) Securities brokerage services.
Securities brokers operating within certain Kentucky Enterprises Zones defined
by
KRS
141.121(4)(c), shall
apportion income pursuant to
KRS
141.120 and this administrative regulation,
except that a securities broker so defined may elect an alternative method for
determining receipts pursuant to
KRS
141.121(4)(c).
(11) Truckline. Trucklines shall determine
transportation receipts in this state by multiplying total transportation
revenues by a fraction, the numerator of which shall be miles operated in this
state and the denominator of which shall be total miles operated for the
taxable year.
STATUTORY AUTHORITY:
KRS
131.130,
141.018,
141.120,
141.121