Utah is lucky to be home to one of the most business friendly tax environments in the nation. This contributes to our overall business climate, quality of life and low cost of living, which boosts our economic growth and entices business investment. To build on this success, the Legislature has asked the Utah Tax Review Commission to review business taxes at both the state and local level and make recommendations for improvements.
The Utah Tax Review Commission (TRC) is composed of members of the Legislature, private citizens, and state government officials. At the request of the Legislature or Governor, the TRC studies and makes recommendations regarding Utah’s state and local tax system. Specifically, the TRC is reviewing expanding Utah’s single-sales factor apportionment of corporate franchise tax to a broader number of industries. Additionally, the TRC is reviewing the punitive sales tax on manufacturing inputs that do not last more than three-years.
In fact, according to Ernst & Young, LLP, Utah employers paid $4.5 billion (FY2014) in state and local taxes with an overall effective tax rate of 3.8% or $4,200 business taxes per employee. Overall Utah’s businesses paid 34.1% of all state taxes and 57.7% of all local taxes in FY2014. This does not include the taxes paid by employees on wages paid by Utah employers, and has led to the second-fastest growth in personal income in the nation at 4.1%.
Focusing on the corporate franchise tax, in 2010, Utah became a single-sales factor (SSF) state with some exceptions. This is a tax on business in Utah and is based on net income. Every corporation must file a return and pay the tax each calendar or fiscal year, regardless of whether or not a profit was made or business was conducted. The tax rate is computed at 5% of net income with a $100 minimum tax, whichever is greater.
Every business with a nexus in Utah is subject to the single-sales factor method of taxation, unless the business is in one of six industries: (1) mining, (2) natural gas distribution, (3) manufacturing, (4) transportation and warehousing, (5) information services, and (6) finance and insurance. If a business is in one the six exempted industries, the business must choose between the three-factor method and the double-weighted sales method of apportionment. The Office of Legislative Research and General Counsel have prepared an excellent summary of this available here.
Because of this policy, of the 20,368 corporate returns only 29% of Utah companies representing 97% of the value of corporate collections did not pay the minimum tax in the 2013 tax year. Of those, nearly 60% of corporate taxes are paid by the the six industries that are not able to elect the single-sales factor method of taxation.
This past legislative session, the Salt Lake Chamber supported expanding the single-sales factor apportionment in H.B. 61 with one of few Priority Votes. The bill authorized all taxpayers to choose between equally weighted three-factor apportionment, double weighted sales factor apportionment, and single-sales factor apportionment.
The Legislation passed in a revised form, establishing a new form of taxpayer known as: optional sales factor weighted taxpayer, and only for a select number of Utah companies. This is projected to reduce individual and business tax liability to 313 semiconductor manufacturers by a total of $2,773,000 or $8,859 for the average affected entity.
The Chamber’s robust support was because of the bill’s policy intent to incentivize and encourage investment by high-wage, export-oriented companies that have the option of locating in any state. A dynamic-fiscal note attempted to model this impact and showed that with a strong business response the tax reduction would more than pay for itself. The TRC however is yet to be convinced on the effectiveness of this apportionment strategy at incentivizing economic development when accounting for the project revenue losses to the state.
In the months ahead the TRC will continue to discuss expanding Utah’s single-sales factor apportionment to a broader number of industries. Additionally, the TRC is reviewing the punitive sales tax on manufacturing inputs that do not last more than three-years.
The Salt Lake Chamber will continue to be an active participant in this process to support tax policies that strengthen Utah’s economy and properly balance tax simplicity, efficiency, fairness, revenue sufficiency and transparency.
The next TRC meeting is set for August 25 at the Utah State Capitol. If you are interested in receiving further updates on this issue please subscribe to our Business Climate, Taxes and Regulation list and/or contact Michael Parker.