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Iowa Corporate Income Tax Apportionment Issues and Opportunities


By Bruce Baker and Dwayne Vande Krol

The Iowa statutes and administrative rules have long provided corporations that conduct business both inside and outside of Iowa with the ability to compute income tax based only on income apportioned to Iowa.  However, in light of nexus standards that impose Iowa income tax on corporations that may conduct few activities within the state, the issue of fair and equitable apportionment has taken on increased importance.  This article will address some of the key issues and opportunities related to Iowa’s corporate income tax apportionment rules.

The right to only pay tax on income from Iowa sources is often referred to as the “right to apportion.”  The Iowa Department of Revenue’s rules provide that a corporation has the right to apportion if it has “business activities in at least one other state sufficient to meet the minimum constitutional standards for doing business in a state under the due process and commerce clauses of the United States Constitution.”  The rules provide a long list of activities that will meet this standard if conducted in one or more other states on a regular, systematic, and continuous basis. 

Importantly for some taxpayers, the Department’s rules state that certain activities providing corporations with the right to apportion income to Iowa may not trigger an income tax obligation in other states due to the protections afforded by Public Law 86-272.  P.L. 86-272 is a federal law which generally prohibits the taxation of a corporation if its only activities in a state are the solicitation of orders which are approved and filled by shipment or delivery from outside the state.  As a result, a corporation does not necessarily have to file tax returns in another state in order to have the right to apportion income to Iowa if its activities in the other state are protected by P.L. 86-272.

The right to apportion must also be analyzed when determining whether a resident shareholder is entitled to claim the Iowa S corporation apportionment credit.  This credit is available to resident shareholders of S corporations that “carry on business within and without the state.”  The criteria used to determine whether the S corporation is carrying on business within and without Iowa is the same as for other types of corporations.

Once a corporation has the right to apportion income for Iowa tax purposes, the portion of a corporation’s income from its regular trade or business that is attributable to Iowa is determined by a single-factor formula based on the amount of receipts sourced to Iowa as compared to the corporation’s total receipts.  This formula is referred to as the corporation’s “business activity ratio.”  Many corporations compute the Iowa business activity ratio by using the general rules applicable to either the “manufacture and sale of tangible personal property” or the “manufacture and sale of other than tangible personal property.”

Unlike many other states, Iowa law does not require that sales of tangible personal property shipped from Iowa to states in which the corporation is not taxable be “thrown back” to Iowa.  Thus, assuming the corporation has the right to apportion, sales shipped from Iowa to states in which the corporation does not have nexus can result in income that is not subject to tax in any state.

In general, Iowa’s statutes and rules provide that sales of tangible personal property are sourced to the state of destination.  However, issues and opportunities can arise when determining the state in which goods are “ultimately destined.”  For example, should a sale of goods to a third-party distribution center in Iowa be sourced to Iowa when the goods are subsequently shipped out-of-state?  Or should the seller “look through” the distribution center to the state of the final consumer?

The Iowa Code provides that sales of other than tangible personal property, including sales of services, are to be “specifically allocated or equitably apportioned within and without the state under rules of the director.”  The Department of Revenue’s rules provide that gross receipts are includable in the numerator of the business activity ratio if the recipient of the service “receives benefit of the service” in Iowa.  This “benefits received” test is a variant of market-based sourcing.  Many other states still use tests for sourcing sales of services that are based upon where the service provider incurs the costs of performing those services.  This can create tax issues for service providers in cost-of-performance states selling into Iowa, as well as tax opportunities for Iowa-based service providers that sell into cost-of-performance states.

Special methodologies for computing the Iowa business activity ratio are provided for corporations in certain industries.  Industries with special apportionment methods include transportation companies (generally based on revenue or total miles), pipeline companies and other utilities (generally based on “traffic units”), telecommunications companies (generally based on origination and/or destination of communication services), radio and television companies (generally based on audience), publishing companies (generally based on subscribers and/or advertisers), and financial organizations.

For various reasons, including the rapid pace of change in how business is conducted today, Iowa’s apportionment rules can become outdated or inapplicable to certain taxpayers or industries.  Iowa law provides that corporations for whom the statutory method of apportionment is inequitable may petition the Director of the Department of Revenue for the right to use an alternative method of allocation and apportionment.  The Department’s rules provide that separate accounting is a potential alternative method.  Other alternative methods which may be considered include adjustments to how receipts are sourced to Iowa and/or revisions to the factor or factors used to compute the business activity ratio.

Please contact us with questions or if we can be of assistance concerning the issues and planning opportunities related to Iowa’s corporate income tax apportionment rules.



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