TECHNICAL ADVICE MEMORANDUM
Subject: Domestic Corporations and Income Apportionment
Schedule: Corporate Income Tax - Article 4, Schedule D
Statute: G.S. 105-130.4
Issued By: Corporate, Excise, and Insurance Tax Division
Date: September 16, 1997
Reference: CTAM 97-15
G.S. 105-130.4(b) states that: "A corporation having income from business
activity which is taxable both within and without this State shall allocate
and apportion its net income or net loss as provided in this section. For purposes
of allocation and apportionment, a corporation is taxable in another state if
(i) the corporation's business activity in that state subjects it to a net income
tax or a tax measured by net income, or (ii) that state has jurisdiction based
on the corporation's business activity in that state to subject the corporation
to a tax measured by net income regardless whether that state exercises its
jurisdiction. For purposes of this section, 'business activity' includes any
activity by a corporation that would establish a taxable nexus pursuant to 15
United States Code section 381."
The North Carolina Administrative Code, in 17 N.C.A.C. 5C.0604(a), states that:
"If the taxpayer voluntarily files and pays an income tax to a state other
than North Carolina when not required to do so by the laws of that state or
pays a minimum fee for qualification, organization or for the privilege of doing
business in that state, but does not actually engage in business activities
in that state, or does actually engage in some activity, not sufficient for
nexus, and the minimum tax bears no relation to the corporation's activities
within such state, the taxpayer is not subject to tax within that state and
is therefore not taxable in another state." "
A domestic corporation cannot apportion or allocate its net income or net loss
among this State and another state unless the corporation has "business activity"
in the other state that is taxable under Public Law 86-272. The Department's
criteria for determining if a domestic corporation has "business activity",
and therefore a taxable nexus in another state, is the same as the Department's
criteria for determining whether a corporation is "doing business" in North
Carolina under 17 N.C.A.C. 5C.0102.
Company A is a foreign corporation engaged in the furniture
industry as a manufacturer. The corporation's manufacturing facilities and
operations are located entirely outside North Carolina. The corporation leases
a showroom in North Carolina on an annual basis, but only occupies the leased
space three times per year for periods of two weeks at a time, and employs
salespersons in this State. The inventory in North Carolina is used for display
purposes only. All customer orders are approved and shipped from a point outside
of North Carolina.
Company B is a North Carolina corporation engaged in the
furniture industry as a manufacturer. The corporation's manufacturing facilities
and operations are located entirely in North Carolina. The corporation leases
a showroom in State C on an annual basis, but only occupies the leased space
three times per year for periods of two weeks at a time, and employs salespersons
in State C. The inventory in State C is used for display purposes only. All
customer orders are approved and shipped from North Carolina.
In the above example, Company A would not be required to file a North Carolina
corporate income and franchise tax return. Although 17 N.C.A.C. 5C.0102 defines
"doing business" to include "the owning, renting, or operating of business or
income producing property in North Carolina", Company A limits its usage of
the leased property to two furniture shows per year. It is the Department's
position that Company A's activity in this State is protected and not subject
to tax in this State by application of Public Law 86-272 if, for example, the
shows are conducted no more than three times per year and are limited in duration
to periods of fourteen days or less.
Based on these facts, Company B would not be allowed to apportion its net income
or net loss to North Carolina and other states under the provisions of G.S.
105-130.4 because it does not have taxable nexus in State C or any other state
under Public Law 86-272. If State C requires Company B to file an annual corporate
tax return solely because the company has obtained a certificate of authority
to do business in that state, the result would be the same in that apportionment
would not be allowed because the mere holding of a certificate of authority
along with other protected activities do not give rise to "doing business" in
Last modified on:
10/31/07 03:36:05 PM.