The Utah Corporate Franchise Tax: An Overview
Who Pays? By Size and Major Industry
Getting Our Fair Share
A state does not get to tax all the income belonging to a corporation doing business within its borders, but may only tax that part which represents its share of the income generated by the corporation. Determining the share is, however, fraught with difficulty, since assigning the actual profit created in a state is next to impossible. If XYZ corporation produces composted fertilizer in Wyoming and ships it to a Utah outlet for sale, where does the profit occur? Utah may like to say that since all the sales occur in Utah, the only cost that can be subtracted from Utah sales is the actual cost of production in Wyoming. The firm may want to take as much of the profit in Wyoming as possible since profits are not taxed there, saying the only profit occurring in Utah is the revenue minus the retailing cost minus the price at the border which would include a healthy profit for Wyoming production.
To get around endless arguments about where the "true profit" occurred, the general practice among the states is to divide the total profit according to the firm's relative economic presence in the state. Utah defines the presence, as do many other states, as the average of the wage share, the sales share, and the property share in Utah. (See Schedule J in appendix A for further clarification.) The fraction is called the "apportionment fraction," and when it is applied to an amount, such as "net income" it is called "apportioned net income." In simple terms, an apportioned amount is that amount that is relevant for Utah purposes.
In this report, with the exception of the
section on apportionment, all data is reported
in apportioned form as it is relevant to Utah.
Our Fair Share of What?
This is obviously not the place to include a treatise on the corporate tax base, since determining what goes in the corporate tax base and what is allowed as a deduction is very complicated, with many fine nuances and details. As a rule, the state tax base is close to the federal base, with minor exceptions, which we will survey here. (The basic federal return, 1120, is also included in appendix A.)
Chart 2.1 plots the magnitude of various
income measures on the vertical axis, for tax
years 1994 and 1995. The first table shows the
raw data and the second shows the relation to
federal taxable income. For these two years
only about six percent of income escapes
taxation due to Utah provisions or due to not
being able to tax non-business income
generated out of state. The dollar amounts
reported in this section are for firms paying
taxes on the basis of income rather than due to
the minimum tax, since the income magnitudes
are irrelevant in determining taxes for these
firms. Appendix B shows much more detail as
well as separate table for minimum tax firms.
TAX PAYMENTS BY INCOME CLASS
Table 2.2 and the accompanying graph report the dollar value and share of taxes paid for non-minimum taxpayers, as reported on tax returns for 1994 and 1995. The most obvious fact is that a very large share of taxes are paid by the large corporations. On average, companies with an apportioned income larger than $1 million paid more than 78 percent of the taxes, and those with income less than $100,000 paid less than 6 percent of the taxes.
It is worth noting that taxes paid
increased by well over 15 percent between
these two years, while the number of non-minimum taxpayers was increasing by less than
8 percent. The large increase in the taxes paid
by the top brackets and the actual decrease in
taxes paid by some middle incomes may attract
unwarranted attention. A glance at the detailed
appendix tables for 1994 and 1995 reveal that
the number in the top two classes, for
example, rose from 72 to 93, whereas the
number in the $40,000 to $75,000 class
actually fell. Thus we are observing the
migration of firms between classes as well as
the fortunes of firms within a class. As this
paragraph demonstrates, a real understanding
of corporate tax developments requires
consulting the detailed appendices.
TAX RETURNS BY INDUSTRY
Table 2.3 and the chart are similar in content and structure, to the previous table, but includes all corporate taxpayers. The non-coded sector makes the largest contribution to corporate tax receipts, paying over $30 million for returns filed in 1995. This figure includes minimum tax payments as well as regular taxes. The manufacturing sector follows next with payments over $28 million, and agriculture is the trailing sector, paying $1.1 million. The largest growth in taxes were in mining (110%), non-coded (29%), and manufacturing (20%). Transportation, communication and utilities (-10%) saw decreases in taxes paid.
Some readers may be confused by the low share for services, since much has been made recently of the growing importance of services. The discrepancy is explained by the narrow definition of services used, which includes basically personal and professional services. When some analysts indicate services are more than 50 percent of the economy, for example, they are generally including the last five major groups. Additionally, many of the growing service firms are not corporations, or are S-corporations which are not subject to corporate income taxes.