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

 

General Statute

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."

Departmental Rule

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." "

Department's Position

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.

Example:

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 North Carolina.