RE: Single Factor Apportionment Method
October 5, 2007
This is a letter ruling issued by the Director of Revenue pursuant to Section 536.021.10, RSMo 2000, and Administrative Regulation 12 CSR 10-1.020, in response to your letter dated August 15, 2007.
The facts as you presented them in your letter and in response to the Department of Revenue’s (department) request for additional information are summarized as follows:
Applicant is an enterprise that provides programs and related services to individuals receiving benefits, and the State Children’s Health Insurance Program (SCHIP). Applicant is a Delaware corporation commercially domiciled in Missouri with corporate headquarters in Missouri. Applicant wholly owns several corporations that operate Organizations that operate in various states throughout the country. All of Applicant’s organizations are members of its affiliated group of corporations and are included on Applicant’s consolidated income tax return for federal income tax purposes.(1) None of the organizations are required to pay annual tax on gross premiums in Missouri. Applicant’s organizations include:
- First (Organization providing care to Missouri beneficiaries and domiciled in Missouri) (2)
- Second (Organization providing care to non-Missouri beneficiaries and domiciled outside Missouri)
- Third (Organization providing managed care to non-Missouri beneficiaries and domiciled outside Missouri)
- Fourth (Organization providing managed care to non-Missouri beneficiaries and domiciled outside Missouri)
- Fifth (Organization providing managed care to non-Missouri beneficiaries and domiciled outside Missouri)
- Sixth (Organization providing managed care to non- Missouri beneficiaries and domiciled outside Missouri)
- Seventh (Organization providing managed care to non-Missouri beneficiaries and domiciled outside Missouri) (3)
- Eight (Organization providing managed care to non-Missouri beneficiaries and domiciled outside Missouri)
Each of the organizations referred to above are licensed to operate as organizations and/or insurance companies in its respective state. The organizations are not licensed to operate or conduct business outside of each one’s state of domicile. Each organization is regulated by the laws of the state in which it is located. These requirements also include the retention of a Administrator (“A”) licensed to do business in the respective state. Because each state has a unique and complex set of requirements, all of the organizations listed above contract to provide care exclusively with its state of commercial domicile and provide benefits exclusively to those within its respective state.
States contract with the organizations in order to manage the states’ costs. Each organization receives a negotiated premium from the state on a per member basis. These premiums are paid directly to the organizations and are deposited into each respective organization’s account in Illinois. Covered expenses incurred by beneficiaries of the plan are paid out of this same account directly to the provider for services rendered. Under the terms of the contract, the organizations agrees to pay for covered services provided to residents of the respective state that is enrolled in the state’s program. Under the terms of the agreements, these services must be provided by a provider within the respective state the plan is located.
The majority of each organization costs are paid directly to providers within the respective state for the provision of services.(4) In addition to the direct expenses paid for the benefit of beneficiaries, each organization contracts with LLC, a single member limited liability company commercially domiciled in Missouri, to act as its A (as discussed above). LLC is licensed by and within each respective state of each of Applicant’s organization. LLC is responsible for the administrative aspects of coordinating the payment of claims on behalf of each of the organization.
LLC is owned by Applicant. LLC operates facilities such as centers and centers in various locations throughout the United States, including Missouri. Each organization pays LLC a fee based on the percentage of the receipts of the organization. This percentage is set forth in the contract that the organization enters into with each respective state. Because LLC is an affiliate of each of the organizations, each state’s respective regulatory body must approve any fees paid by the organization to LLC.
For federal income tax purposes, Applicant includes the organizations as members of its federal consolidated income tax return. As a single member limited liability company owned by Applicant, the operations of LLC are included in Applicant’s own items of income, loss, and other tax attributes. In addition to the organizations, the Applicant’s consolidated group includes several other members. Amongst the members not at issue in this letter ruling, some are commercially domiciled in Missouri while others may have little to no business being transacted or partly transacted within the state. These additional members are primarily the result of acquisitions by Applicant in an effort to expand its enterprise in the areas of consultation, management, and various other consulting fields.
- May the members of Applicant’s affiliated group (including Applicant itself), in determining the portion of affiliated group’s Missouri taxable income as is derived from sources within Missouri, elect to use the Missouri single factor method of apportionment provided in section 143.451.2?
- To what extent are the receipts from inter-company sales between LLC and the member organizations, included as sales “transacted wholly within,” sales which are transacted “partly within this state and partly without this state,” and sales “wholly without” Missouri?
- Are gross premiums paid to a Missouri organizations, by the state of Missouri, for the benefit of Missouri beneficiaries and for the provision of services to said beneficiaries wholly within Missouri, under the Missouri single factor apportionment method, properly included as sales transacted “wholly within this state?”
- Are gross amounts paid to a non-Missouri organization (a consolidated affiliate of Applicant), by a state other than Missouri, for the benefit of non-Missouri beneficiaries and for the provision of medical services to said beneficiaries wholly outside of Missouri, under the Missouri single factor apportionment method, properly included as sales which are transacted “partly within this state and partly without this sate,” or rather sales “wholly without” Missouri?
- Yes, the Applicant’s affiliated group may elect to use the Missouri single factor method of apportionment provided for in Section 143.451.2 pursuant to Regulation 12 CRS 10-2.045.
- The receipts for any inter-company transactions between the member organization domiciled in Missouri and LLC (which is commercially domiciled in Missouri and whose receipts are included in the receipts of the Applicant’s for tax purposes) are properly included as “wholly within” Missouri (included in full in both the numerator and denominator of the apportionment formula) because those inter-company transaction are conducted completely within Missouri. As for those receipts arising from transactions between LLC and the out-of-state member organizations, the receipts are included as “partly within and partly without” this state (included in full in the denominator and half in the numerator of the apportionment formula) and the “brains” of LLC’s operations are located within the state of Missouri. Therefore, as the “brains” of LLC’s operations are located within the state of Missouri, lending Missouri effort to all business transactions of LLC, none of the receipts from any inter-company transaction involving LLC would be classified as “wholly without” Missouri in determining the affiliated group’s Missouri apportionment percentage.
- Yes, under the Missouri single factor apportionment method, amounts paid to a Missouri organization, by the state of Missouri, for the benefit of Missouri beneficiaries and for the provision of services to said beneficiaries wholly within Missouri would be properly included as “sales transacted wholly within this state” along with all other sales transacted wholly within this state of other affiliated group members, in determining the affiliated group’s Missouri apportionment percentage.
- Under the Missouri single factor apportionment method, gross amounts paid to a non-Missouri organization (a consolidated affiliate of Applicant), by a state other than Missouri, for the benefit of non-Missouri beneficiaries and for the provision of services to said beneficiaries wholly outside of Missouri, are properly included as sales “wholly without” Missouri, in determining the Applicant’s consolidated Missouri apportionment percentage for the affiliated group.
Pursuant to section 143.431.3(1), Missouri permits affiliated groups of corporations an election to file their Missouri corporation income tax return on a consolidated basis. An affiliated group of corporations doing business in interstate commerce that elects to file on a consolidated basis, must apportion the group’s consolidated taxable income using one of the methods outlined in regulation 12 CRS 10-2.045(18). When a group of affiliated corporations elect to file a consolidated Missouri corporation income tax return, all affiliated members’ income, even those members who are not otherwise required to file a Missouri return, must be included in the group’s taxable income. Likewise, when using the single factor sales (business transactions) method of apportionment provided in Section 143.451.2 for determining the group’s Missouri apportionment percentage, each affiliated member’s total sales must be included in the apportionment formula.
The single factor apportionment method, as it is set out in Section 143.451.2(2)(b), provides the following formula for computing the portion of each corporation’s income that is from sources in Missouri:
The amount of sales which are transacted wholly in this state shall be added to one half of the amount of sales which are transacted partly within this state and partly without this state, and the amount thus obtained shall be divided by the total sales or in cases where sales do not express the volume of business, the amount of business transacted wholly in this state shall be added to one-half of the amount of business transacted partly in this state and partly outside this state an the amount thus obtained shall be divided by the total amount of business transacted, and the net income shall be multiplied by the fraction thus obtained, to determine the proportion of income to be used to arrive at the amount of Missouri taxable income.
Regulation 12 CRS 10-2.045 (18)(A) states that if each member of the affiliated group, if filing a separate company Missouri return, would qualify to determine that portion of its Missouri taxable income as is derived from sources within Missouri by application of the interstate division of income methods as set forth in Section 143.451.2, then the affiliated group, as a whole, shall use the single factor sales method. For the purpose of determining the amount of sales or business transacted in determining the Missouri apportionment percentage of a consolidated group, all inter-company sales of the group must be included in the formula pursuant to 12 CRS 10-2.045 (19).
Here, as the organizations are not obligated to pay Missouri the tax codified in another section, they would all qualify to file and pay Missouri corporation income tax and in doing so, to use the interstate division of income methods of Section 143.451.2 for determining their Missouri corporation taxable income. Additionally, as the organizations do not have “sales,” sales would not be the best variable to use to most accurately express each organizations volume of business conducted within and without Missouri. Therefore, amounts would be a more accurate indication or the volume of business being conducted within and without this state for purposes of the Missouri single-factor apportionment test and may be used as such.
The Missouri statutes do not expressly state what is meant by “partly within and partly without” this state. However, in Bank Bldg. & Equip. Corp. v. Director of Revenue, 687 S. W. 2d 168, 171 (Mo. banc 1985), the Missouri Supreme Count found that income was partly from transactions within Missouri when the “brains” (those involved with the planning, designing and directing) of an operation being conducted in another state are in Missouri. The court reiterated this opinion in Maxland Development v. Director of Revenue, 960 S.W. 2d 503, 506 (Mo. banc 1998), where it found that sales are at least partly within Missouri where “Missouri effort is among the efficient causes which contribute directly to the production of the income.”
In the case of the Applicant’s organizations, those amounts from the organization domiciled in Missouri providing services exclusively within this state, would be categorized as “wholly within” as Missouri effort is the sole cause of the income production. In the alternative, for those organizations who are located wholly outside of Missouri serving customers wholly outside of Missouri, their amounts would be categorized as “wholly without” this state. Further, when looking at the inter-company transactions between LLC and the organizations located wholly without Missouri, where LLC is domiciled in Missouri and presumably conducts a significant portion of its management and administrative functions from within Missouri, the receipts from such transactions would be considered “partly within and partly without” this state. As well, when looking at the inter-company transactions between LLC and the organization located wholly within Missouri, the receipts from such transactions would be considered “wholly within” this state as both entities are located within the state of Missouri and operate the functions of the inter-company contract from within the state. These receipts from LLC’s inter-company transaction would be reflected in the total sales of Applicant for purposes of determining the Missouri apportionment percentage of sales under Section 143.451.2 as they flow through the limited liability company to the Applicant. Additionally, all other sales of all members of the affiliated group and inter-company transactions thereof not specifically addressed in this letter ruling request would have their categorization determined under the same principles as those herein stated.
This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.
Should additional information be needed, please feel free to contact Melissa Morgan, General Counsel’s Office, Post Office Box 475, Jefferson City, MO 65105-0475 (phone 573-751-0961), or me.
- While all of the Organizations are members of the affiliated group, it is important at this time to point out that these organizations are not the only members of Applicant’s affiliated group and therefore not the only members to be considered when determining Applicant’s Missouri income tax apportionment percentage under the single factor apportionment method.
- This organization was sold by the taxpayer in early 2007 and therefore is no longer a member of the affiliated group but would be included in the affiliated group for purposes of Applicant’s 2006 consolidated income tax return.
- This Organization was sold by the taxpayer in early 2007 and therefore is no longer a member of the affiliated group but would be included in the affiliated group for purposes of Applicant’s 2006 consolidated income tax return.
- The actual cost percentage varies by year and entity based on the claims filed. The profitability or loss of each organization directly correlates to the number of claims filed by residents of the respective states.