Does an out-of-state bank create Utah nexus by using independent mortgage brokers and relationship managers to originate Utah home loans, and does that nexus reach its subsidiary and LLC too?

Plain-English summary

An out-of-state bank, seeking to comply with new FIN 48 financial-reporting rules requiring companies to reserve for uncertain state tax positions, commissioned a nexus study across roughly 20 states. It then approached Utah (and presumably other states) to request either a ruling that it had no nexus, or, if it did, a voluntary disclosure agreement (VDA) limiting the lookback period and waiving penalties. The bank's structure: it wholly owns "Sub 1" (an LLC taxed as a C corporation) and holds a 1% interest in "LLC" (an LLC taxed as a partnership), with Sub 1 holding the other 99% of LLC — giving the bank 100% effective control of both. The bank generates mortgage loans nationwide through more than 30 independent "Relationship Managers" who coordinate with roughly 1,000 independent mortgage brokers; loans secured by Utah real estate close through independent title companies on the bank's own documents, are reviewed and approved by bank personnel in its home state, and are later either sold or contributed into the LLC as loan participations.

Nexus for the Bank: yes. The Commission held the bank has Utah nexus and is taxable under either the corporate franchise tax (§ 59-7-104) or corporate income tax (§ 59-7-201). The key point: it doesn't matter that the Relationship Managers and brokers are independent contractors rather than bank employees. Citing Scripto v. Carson, 362 U.S. 207 (1960) (a sales tax case where the U.S. Supreme Court held that using independent contractors instead of employees to solicit sales was "without constitutional significance" for nexus purposes) and Tyler Pipe Industries v. Washington Dep't of Revenue, 483 U.S. 232 (1987), the Commission found these agents' Utah-directed loan-origination activities — aimed squarely at establishing and maintaining the bank's market for mortgages secured by Utah property — were enough to create nexus, regardless of employment status. Separately, the Commission noted Public Law 86-272 doesn't help the bank here at all: that federal law only limits state taxing power over businesses selling tangible personal property, not a banking/lending enterprise like this one.

Nexus for the Subsidiary and LLC: extended through the unitary group, not separately analyzed. The LLC (taxed as a partnership) has its income and apportionment factors flow up to its corporate partners — Sub 1 and the Bank — under Rule R865-6F-8(10)(e). Because the bank and Sub 1 together met Utah's "unitary group" definition (§ 59-7-101(28)(a): common ownership plus economic interdependence shown by centralized management, functional integration, and economies of scale — easily met here given 100% common ownership, shared headquarters office space, and cross-entity management/accounting/legal services), Sub 1 was treated as having Utah nexus too, without a separate nexus analysis. This uses the financial-institution "Finnigan"-style attribution rule in Rule R865-6F-32(15)(b): once any financial institution member of a unitary group has Utah nexus, the receipts of every financial institution member in that group get attributed to Utah under the apportionment rules — no need to establish nexus entity-by-entity.

Practical outcomes granted: The Commission approved the requested VDA/VFA terms — the bank and Subsidiary would file a combined unitary Utah return for 2004 through the current year, all penalties waived, and pre-2004 liability forgiven, contingent on no material change in facts or law. Because nexus was found, the bank's alternative requests (a no-nexus ruling, or a "decide uncertainty in our favor" prospective-filing option) became moot. The Commission confirmed the bank and Subsidiary must file a Utah combined water's-edge report under § 59-7-402 (with the option to instead elect worldwide combined reporting under § 59-7-403, an election that, once made, can only be revoked with the Commission's consent), with the LLC's income and factors flowing through pro rata onto that combined return. The VDA was limited to corporate income/franchise tax only, consistent with the bank's representation that its Utah activities involved no employees, no withholding, and no other collected taxes.

What this means for you

Out-of-state banks and mortgage lenders using independent loan originators

Using independent contractors rather than your own employees to originate loans in a state does not avoid nexus — courts and the Commission treat agent-driven, in-state market-building activity the same as employee-driven activity. If your loans are secured by real estate in a state, review your originator network there for nexus exposure, regardless of employment classification.

Financial holding companies with parent/subsidiary/LLC structures

If one entity in your unitary group has Utah nexus as a financial institution, don't assume you need to separately prove nexus for every affiliated financial institution — Utah's attribution rule pulls all of them in together once any one member has nexus, and a pass-through LLC's income/factors flow up to its corporate partners regardless of the LLC's own nexus status.

Companies pursuing FIN 48 compliance through voluntary disclosure

A well-documented VDA request, even one that surfaces real historical nexus, can still secure a limited lookback period and full penalty waiver — the Commission was willing to forgive pre-2004 exposure and waive penalties in exchange for prospective compliance, even though nexus was ultimately confirmed rather than ruled out.

Businesses relying on Public Law 86-272

Remember that P.L. 86-272 only protects sellers of tangible personal property whose in-state activity is limited to solicitation — it provides no shelter at all for banking, lending, or other service-based enterprises, however similar their in-state footprint might look to a protected seller's.

Common questions

Q: Does it matter that the Relationship Managers represented only the Bank and not the Subsidiary or LLC?
A: The Commission's nexus finding for the Bank rested on the Bank's own agents' activities. The Subsidiary's nexus came not from its own in-state activity but from unitary-group attribution once the Bank (a fellow financial institution in the same group) had nexus.

Q: Why didn't the Commission need to separately determine whether the LLC has nexus?
A: Because the LLC is taxed as a partnership, its income and apportionment factors flow through pro rata to its corporate partners (the Bank and Subsidiary) under Rule R865-6F-8(10)(e) — the relevant nexus and filing questions attach to those corporate partners, not the pass-through entity itself.

Q: What could undo this outcome for the taxpayer?
A: The Commission's agreement was expressly conditioned on no material change in the facts as represented, or in Utah's statutes, rules, or case law. A shift in either could change the analysis going forward.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-7-104 (corporate franchise tax) and § 59-7-201 (corporate income tax)
• Utah Code Ann. § 59-7-101(28)(a) (unitary group definition: common ownership + centralized management/functional integration/economies of scale)
• Utah Code Ann. § 59-7-402 (combined water's-edge report) and § 59-7-403 (worldwide combined reporting election)
• Utah Admin. Rule R865-6F-32(2)(d), (3)(d)(i), (k) (financial institution receipts factor; unitary group factors included)
• Utah Admin. Rule R865-6F-32(15)(b) ("Finnigan"-style attribution — one nexus member pulls in the whole financial-institution unitary group)
• Utah Admin. Rule R865-6F-8(10)(e) (partnership income/factors flow through to corporate partners)

Cases:

• Scripto, Inc. v. Carson, 362 U.S. 207 (1960) (independent contractors create nexus the same as employees)
• Tyler Pipe Industries v. Washington Dep't of Revenue, 483 U.S. 232 (1987) (in-state agent activity establishing/maintaining a market creates nexus)

Prior Commission guidance cited:

• Utah Advisory Opinion 01-013 (Nov. 27, 2001) (nexus for out-of-state banks lending to Utah customers)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/07-010.pdf

Original ruling text

REQUEST LETTER

07-010

June 26, 2007

NAME
COMPANY
ADDRESS

Dear TP REP NAME (Auditing Division – Voluntary Disclosure Program)

On our client’s behalf we are requesting that you review the following information and
issues addressed herein. Our client in a calendar year taxpayer, who has not been
contacted by your department on or any other agency on your behalf; is currently not
undergoing nor have they been notified that they have been identified or selected for an
audit by your department or by the Multistate Tax Commission; however, one of our
client’s entities, the Bank, has filed Utah corporate income tax returns in the past.

While not necessarily qualifying for a traditional voluntary disclosure agreement
(“VDA”), many states have alternative arrangements for companies who have previously
filed in their state. These arrangements are sometimes referred as a voluntary filing
arrangement (“VFA”). Our client is seeking a VFA for the Bank and VDA’s for sub 1 and
the LLC, as described in detail below and in the Attachment hereto, if it determined that
one or more of these entities had nexus in Utah. Neither the company nor its subsidiary
entities are currently registered for any Utah taxes.

Under recently enacted FIN 48 accounting rules, SEC registrants, among others, must
report potential income tax exposure issues on their financial statements. Once of the
areas of potential exposure is having nexus in a state where the business is not currently
filing income/franchise tax returns. When deemed appropriate, one way of dealing with
this and other related issues (such as measurement; the concept of “effective settlement”;
and the need for FIN 48 internal control processes, as mandated by Sarbanes-Oxley
(SOX) Section 404) is to pursue VDAs with the affected states.

As part of our client’s attempt to comply with the requirements of FIN 48, they first
engaged COMPANY to perform a Nexus Study, to determine if they had nexus creating
activities in approximately 20 states. Once it was determined that it was likely that the
Bank and possibly one or more members of its group had nexus in one or more of these
states, the client requested that COMPANY contact the affected state departments of
revenue, regarding a request that the department enter into a VFA or VDA with our client
and/or receive clarification from the department, regarding whether or not our client [a
nondomicilary financial institution (“Bank”); their 100% owned subsidiary (“Sub 1”);
and/or their LLC, a dual member limited liability company, taxed as a partnership
(“LLC”)] is, in fact, subject to income and/or franchise tax in your state.

Page 2

In exchange for our client coming forward on a voluntary basis, if it is determined that
the either the Bank, Sub 1 and/or LLC are subject to your state’s income and/or franchise
tax, we are requesting that the lookback period be limited to the fewest number of years
permissible under your statutes or internal VDA or VFA guidelines; and that all penalties
of any kind be waived. In exchange our client will agree to file income and/or franchise
tax returns for the current year and for the lookback period and pay interest at the
statutory rate on the tax liability related to those tax years.

In addition, if it is determined that the Bank, Sub 1 and/or LLC do not have income
and/or franchise tax nexus in your state and are, therefore, not subject to said taxes, we
are requesting that based on facts contained in this letter and the attachment thereto
(Summary of bank’s Subsidiary (Sub 1) and LLC’s Formation and Activities, to be known
as the “Attachment”) and, if necessary, the completion of your state’s nexus questionnaire
or other documentation, you provide a written ruling or other biding document that states
that based on the facts as presented, the Bank, Sub 1 and/or the LLC do not have nexus
and are not subject to your state’s income and/or franchise tax.

Our client is requesting this ruling for two primary purposes. The first relates again to
FIN 48 and the requirement to record potential state income tax liabilities. Being
uncertain of whether or not a company has nexus in a state, could mean it may have to
increase its reserve for a potential income and/or franchise tax liability, for which it may
not actually have a liability. Thus, knowing whether or not our client actually does have
a liability is critical for them, in order for them to comply with the requirements of FIN
48.

The second purpose is that receiving a ruling that establishes that the Bank, Sub 1 and/or
LLC do not have nexus in a particular state for income and/or franchise tax purposes
would be to potentially allow them to not have to book a tax liability for financial
statement purposes would be to potentially allow them to not have to book a tax liability
for financial statement purposes under FIN 48 and should provide, assuming the facts
presented to your department are materially and adequately disclosed, them with
protection against future assertions of liability by your department related to potential
prior year tax liabilities. Further, unless there is a material change in the fats or in your
state’s tax law, rules, regulations, rulings or court cases, the ruling being sought should
also provide our client with a relatively high level of assurance that your department will
not attempt to assert a tax liability against them related to their current and/or future
years.

Based on the facts that were identified and the conclusions researched, as a result of the
Nexus Study performed on behalf of our client by COMPANY, it is our belief that while
the Bank may have nexus in your state, it is unclear whether either Sub 1 or the LLC has
nexus for income or franchise tax purposes in your state. We seek confirmation of these
conclusions. In addition, regardless of what your determination is, in order to document
your determinations for FIN 48 and financial statement purposes, we are requesting an

Page 3

explanation of your determination, including citations of the statutes, rules, regulations,
rulings and/or court cases you relied on to make your determinations.

It is our understanding that the Bank begin business and began filing corporate income
tax returns in your state in 1998 and discontinued filing tax returns in your state in 1999
because they either had an office or had one or more employees located in your state and
either the office was closed or our client no longer had an employee located in your state.
Once the Bank no longer had an office or employee(s) located in your state, they believed
that they were no longer required to file tax returns in your state. Neither Sub 1 nor the
LLC, both formed in 2001, have ever filed income tax returns in Utah.

It was not until COMPANY conducted the Nexus Study on our client’s behalf that they
were advised that the activities of their representatives, as discussed in the Attachment,
might be sufficient to be considered to be nexus creating activities in some states.

As a result, our client has engaged us to pursue either a VDA or VFA with your
department, in order to minimize their exposure to tax liabilities, interest and penalties.
To that end we are requesting that you review the facts contained in this letter and the
Attachment and, if you determine that the Bank, Sub 1 and/or the LLC have nexus in
Utah (based on the facts contained in the Attachment) that you permit, in exchange for
coming forward on a voluntary basis and even though the Bank filed returns in 1998 and
1999; the Bank, Sub 1 and/other LLC to enter into a VFA or VDA, as applicable, with
your department for the tax years between 2003 and the current year and that all prior
year income tax liability be forgiven, along with any potentially applicable penalties.

To summarize our request, we are requesting that based on the various activities of the
Bank, Sub 1 and the LLC you:

1. Determine whether or not the Bank has nexus in your state, including citations
   to statues, rules, regulations, rulings or court cases that support your finding.
2. If the Bank has nexus in your state, permit the Bank to enter into a VFA to file
   Utah Corporation Income or Franchise Tax Returns and pay tax for calendar
   years 2004 through 2006, plus the current year; and that you agree to waive all
   penalties related to these returns and agree to not require our client to file tax
   returns for any tax years prior to those specified in the VFA.
3. Determine whether the LLC and/or Sub 1 have nexus in your state [as
   explained in the Attachment for the LLC based on its limited activities and for
   Sub 1 as the 99% corporate partner of LLC], including citations to statues,
   rules, regulations, rulings or court cases that support your finding.
4. If you determine that the LLC and/or sub 1 have nexus in your state, permit
   the LLC and/or Sub 1 to enter into a voluntary disclosure agreement to file
   either the appropriate Utah Partnership and/or Utah corporation Franchise or
   Income Tax Returns, respectively, and pay the tax for calendar years 2004
   through 2006, plus the current year; and that you agree to waive all penalties
   related to these returns and agree to not require our client to file tax returns for
   any tax years prior to those specified in the VDA.

Page 4

5. If you determine that (based on the facts contained in the Attachment) that the
   Bank, Sub 1 and/or LLC do not have income tax nexus in your state, please
   provide a written ruling or other binding document that states that based on
   the facts as presented, stating that the Bank, Sub 1 and/or the LLC do not have
   nexus and are not subject to your state’s income tax.
6. Similarly to #5 above, if you determine that it is uncertain whether or not the
   Bank, Sub 1 and/or LLC have nexus in your state, our client may be willing to
   consider filing returns on a prospective basis, in exchange for your agreement
   to decide any uncertainty as to potential nexus during those prior years in their
   favor.
7. In addition, please advise us of the availability or requirement of our client to
   file a combined or consolidated return in your state. If combined or
   consolidated filing is permitted, but not require, our client requests that it be
   granted the option of electing to file a Utah corporation combined or
   consolidated tax return, should they choose to do so.
8. Our client activities in Utah are limited to those performed by non-employee
   agents or representatives; therefore our client is not requesting voluntary
   disclosure for any other types of taxes, as they believe they are only
   potentially liable for corporate income taxes.
9. For years after 1999, our client has neither withheld nor collected any types of
   taxes.

Estimate of Income Tax Liability for 2004 through 2006

The Utah income tax liability, which is based on the filing of separate returns, excluding
interest and penalty, is estimated to be:

    Entity          2004             2005             2006
    Bank            $xxx             $xxx             $xxx
    Sub 1           $xx,xxx          $xx,xxx          $xx,xxx
    LLC             LLC is taxed as a partnership–income is flowed through to the Bank and Sub 1.

The information necessary to estimate our client’s tax liability for years prior to 2004 is
not available at this time, however, given that operations in Utah have not varied
significantly from year-to-year, the magnitude of the liability should be similar to
estimated liabilities for 2004 through 2006.

Please review the above request and the Attachment and contact me by return mail, at the
email address or the phone number listed above, so we can discuss next steps related to
the VFA, VDA and/or ruling requests.

Sincerely,

NAME
Tax Executive

Enclosure

Page 5

                     Attachment to Request Letter
              SUMMARY OF BANK’S SUBSIDIARY (SUB 1)
               AND LLC’S FORMATION AND ACTIVITIES

Ownership Structure and Formation of Entities

1. The bank owns 100% of Sub 1, an LLC taxed as a C corporation, and 1% of
   LLC, an LLC taxed as a partnership. Sub 1 owns 99% of LLC. All entities
   are calendar year taxpayers.

2. Sub 1 was formed under the laws of the State of Delaware in 2001. Sub 1 is
   registered to transact business and is commercially domiciled in a Midwest
   state other than the state where the Bank is commercially domiciled.

3. The LLC was formed under the laws of the State of Delaware in 2001. LLC
   is registered to transact business and is commercially domiciled in a Midwest
   state other than the state where the Bank is commercially domiciled.

      BANK, SUB 1 AND LLC ORGANIZATIONAL STRUCTURE
   
                             Bank
                                              100%
   
                           1%                             Sub 1
                                                      (LLC Taxed as a
                                                          C Corp
                             LLC                       99%
                            (Taxed as
                           Partnership
   

Operational Background

4. The following is a general description of the out-of-state activities of the
   Bank. The bank utilizes over 30 independent “Relationship Managers”
   (RMs”), located in at least 15 states, to identify, coordinate and generate loan
   originations from approximately 1,000 independent mortgage brokers
   (“Brokers”), located throughout the United States. These RMs and their
   brokers represent only the Bank and not Sub 1 or the LLC.

5. The Bank pays the RMs a commission based on loans brought to them by the
   RMs that were generated by the Brokers. Most of the RMs are independent
   contractors of the Bank and are paid by the Bank solely on a commission
   basis. Independent contractor RM commissions are reported annually by the
   Bank on Forms 1099. The Brokers are not paid by the bank or the RMs.

Page 6

     They receive their compensation from fees paid by the customers or so-called
     “yield spread premiums”.

6. Independent title companies in the various states close loans on the Bank’s
   documents, per the Bank’s instructions. All loans are reviewed and approved
   by Bank personnel in the Bank’s home state prior to closing. All loans
   documents are reviewed by the Bank’s quality control personnel before the
   loan is funded. All loans held by the Bank and the LLC are serviced by the
   Bank in the Bank’s home state.

7. For the first 30 to 60 days all out-of-state loans are owned by the Bank and are
   recorded on the books of the Bank, as loans available for sale. Once it is
   determined which out-of-state loans will be held, rather than sold, they are
   contributed to LLC and held by LLC. These so-called qualifying out-of-state
   loans, in the form of loan participations, are all contributed to the LLC. 1% of
   loan participation interests are contributed directly by the Bank to Sub 1,
   which then contributes them to LLC. LLC does not sell any of its loan
   participations. All loan participation interests contributed to and held by LLC
   are serviced, for an industry-standard arm’s length fee determined by both
   parties, by the Bank.

8. Foreclosures are managed by foreclosure specialists in the Bank’s loss
   mitigation department in the Bank’s home state. The Bank handles sales of all
   nonperforming loans. For the loans held by the LLC the Bank either sells the
   mortgage or the property with the loss booked on LLC’s books quarterly.
   Thus, following a foreclosure, the Bank may on rare occasions own real
   property in a particular state until said property is disposed of. Neither Sub 1
   nor the LLC own or rent property outside of Indiana or Illinois.

9. The Bank’s business purpose for this structure is so that through the
   segregation of certain real estate and investment operations into a separate
   partnership, LLC the Bank may achieve several business advantages. These
   advantages include but are not limited to: 1) potential source of new capital;
   2) reduced interest rate exposure without detrimental effect to the loan and
   investment portfolio mix; 3) segregation of liability risk; 4) REMIC Election,
   Securitization of loans and/or Private Placement of REMIC Certificates
   Backed by Loans as Collateral; and 5) lower effective state tax rate. A more
   detailed explanation of these business purposes is available upon request.

Accounting and Loan Administration

10. Intercompany fees including rent expense, management fees, and loan
    servicing fees are being recorded between the Bank and LLC. Separate
    general ledgers are being generated for LLC, Sub 1 (LLC’s 99% owner) and
    the Bank only (LLC’s 1% owner). These general ledgers reflect the
    appropriate proportionate share of investment in subsidiary. There is no

Page 7

     payable/receivable between Bank and LLC at year end, as this is settled
     through capital contributions on a monthly basis. Monthly general ledgers are
     printed for LLC and reflect LLC’s equity.

11. All of LLC’s loans are segregated on separate-entity ledgers. The general
    ledger transfers loans and payments between LLC and the Bank. Once a
    month there is a true-up of funds due to and from LLC, Sub 1 and the Bank.
    These amounts, which represent income, expenses and contributions of
    capital, are treated as either contributions to or returns of capital.

Management and Intercompany Transaction of the Bank, Sub 1 and LLC

12. LLC member board meetings are held annually. Separate meeting minutes are
    kept. LLC has its own Investment Policy, which includes Consumer Home
    Equity and Residential First Mortgage loan Participations, as acceptable
    investment instruments.

13. LLC and Sub 1 each have one part-time employee located in their respective
    Midwest states of commercial domicile. LLC and Sub 1 both pay rent for
    office space in the Bank’s headquarters building. The LLC pays management
    fees to both the Bank and Sub 1. Sub 1 pays a management fee to the Bank.
    A securities portfolio was added to LLC in 2006, which includes bonds and
    U.S. agencies. In 2007 mortgage backed securities were added to the
    portfolio held by the LLC. The LLC’s expenses for the year ended December
    31, 2005, were approximately $550,000.

14. Advisory Services Agreements between the Bank and Sub 1 and LLC cover
    the following services:

        Accounting Assistance, Insurance, Financial Statement Preparation, Other
        Financial Services, Legal, Personnel and Salary Administration,
        Regulatory Compliance, and Tax Return Preparation.
    

15. The fee paid to the Bank for these services by Sub 1 and LLC is based on a
    percentage of their respective gross assets as of January 1 of each year.

16. A sublease and License Agreement states that there is identified space, an
    office at the headquarters of the Bank, for which LLC and Sub 1 pay annual
    rent expense of $3,000 and $12,000, respectfully.

                 - End of Attachment to Request Letter -
    

Page 8

                               RESPONSE LETTER

July 30, 2008
NAME
COMPANY
ADDRESS

Re: Private Letter Ruling Request 07-010
Activities of a non-domiciliary bank and related parties with respect to Utah
nexus

Dear Ms. NAME:

We have received your letter requesting a ruling as to whether your client’s activities as a
non-domiciliary financial institution create nexus for Utah corporation franchise and
income tax purposes and if so, whether Utah is willing to enter into a voluntary filing and
disclosure agreement based on the facts and circumstances represented in your letter.

I apologized for the delay in responding to your request. Due to some personnel and
transition issues, we have run into a backlog for our Rulings.

The facts outlined in your letter include the following:

  1. The banking parent company (“the Bank”) holds interests in two limited liability
     companies. The first limited liability company has elected to be taxed as a
     corporation at the federal level and will be referred to as “Subsidiary.” The
     second limited liability company has elected to be treated as a partnership at the
     federal level and will be referred to as “LLC.” (The elections are also effective
     for purposes of Utah income taxes.)

  2. The Bank owns 100% of Subsidiary and 1% of LLC. Subsidiary owns the
     remaining 99 % of LLC, thus leaving the Bank with 100% effective control and
     ownership of both Subsidiary and LLC.

  3. The Bank utilizes more than 30 independent relationship managers (“RM’s”) to
     generate loan originations from independent mortgage brokers throughout the
     United States. The Bank pays a commission to the RM’s based on loans brought
     to them through the independent mortgage brokers.

  4. Independent title companies in various states close loans on the Bank’s documents
     per the Bank’s instructions. Loan review and approval is performed by bank
     personnel in its home state prior to closing.

  5. The Bank holds loans for 30 to 60 days after closing. Loans are either sold to
     third parties or transferred to LLC and Subsidiary as loan participations.

Page 9

6. Foreclosures are handled by foreclosure specialists in the Bank’s loss mitigation
   department. Following a foreclosure, the Bank may on rare occasions own real
   property in a particular state until the property is disposed of.

   You requested a response with regard to nine items on page three of your letter.

Our response to each of the nine items is presented below:

1. Determine whether or not the Bank has nexus in your state including
   citations to statutes, rules, regulations, rulings or court cases that support
   your finding.

The Utah Corporation Franchise Tax imposes a tax on the Utah taxable income of a

foreign or domestic corporation “for the privilege of exercising its corporate franchise or
for the privilege of doing business in the state.” Utah Code Ann. §59-7-104. The Utah
Corporation Income Tax imposes a tax “on the Utah taxable income derived from sources
within this state other than income for any period that the corporation is required to
include in its tax base under Section 59-7-104.” Utah Code Ann. §59-7-201.

 The bank utilizes RM’s, “most of whom are independent agents,”1 to identify,

coordinate and generate loan originations from mortgage brokers. These RM’s and their
brokers represent the Bank. The mortgage loans closed in Utah are on properties located
in Utah. These Utah activities are directed toward the Utah real estate market and are
significantly associated with the Bank’s ability to establish and maintain a market for its
mortgage loans in Utah. It is clear that these activities, if conducted by employees of the
Bank, would constitute nexus. In Scripto v. Carson, 362 U.S. 207 (1960), a sales tax
case, the Supreme Court held that the fact that Scripto used independent contractors to
solicit sales, rather than its own employees, was without constitutional significance. The
presence and activities of those independent contractors was sufficient to provide nexus
for Scripto. We believe the same conclusion is warranted here. See, also, Tyler Pipe
Industries v. Washington Dep’t of Revenue, 483 U.S. 232 (1987). We find the Bank
through the activities described in your letter has established nexus with Utah and is
taxable under either UCA 59-7-104 (Utah corporation franchise tax) or UCA 59-7-201
(Utah corporation income tax). 2

Utah has adopted Utah Administrative Rule R865-6F-32, which provides guidance on

the allocation and apportionment of income from financial institutions. Pursuant to that
rule, Utah receipts, for purposes of the sales factor, include interest income and loan
servicing fees from loans secured by real property if the real property is located in Utah.
Rule R865-6F-32(3)(d)(i) and (k). Furthermore, the rule provides that that the factors of
all members of the unitary group must be included in the apportionment formula. R. 865-
1
We do not believe the result would be different even if all of the Relationship Managers were independent
contractors.
2
While Public Law 86-272 limits a state’s jurisdiction to impose its corporate income/franchise tax on a
business that makes sales of tangible personal property to businesses whose instate activities exceed the
mere solicitation of orders, it does not limit state taxing authority over business enterprises that engage in
business activity other than the sale of tangible personal property, such as the banking enterprise described
in your letter.

Page 10

6F-32(2)(d). As noted below, we believe the Bank and Subsidiary are both members of a
unitary group and must file a combined report.

Further, the Tax Commission issued an advisory opinion on November 27, 2001 that

is public information, identified as Advisory Opinion number 01-013 (copy attached)
addressing the nexus issue with respect to out of state banks making loans to customers
within Utah. The reasoning of that opinion is equally applicable here.

2. If the bank has nexus in your state, permit the bank to enter into a
   “Voluntary Disclosure Agreement” (VDA) to file Utah Corporation Income
   or Franchise Tax Returns and pay tax for calendar years 2004 through 2006
   plus the current year; and that you agree to waive all penalties related to
   these returns and agree to not require our client to file tax returns for any tax
   years prior to those specified in the VFA.

   The Tax Commission agrees to allow the Bank to enter into a Utah Voluntary
   Disclosure Agreement using the look back period requested in the above paragraph.

3. Determine whether the LLC and/or Sub 1 have nexus in Utah [as explained
   in the Attachment for the LLC based on its limited activities and for Sub 1 as
   the 99% corporate partner of LLC], including citations to statutes, rules,
   regulations, rulings or court cases that support your finding.

   The activities of the LLC taxed as a partnership, both income and loss and its
   

   factors, flow up through and are considered activities of Subsidiary and the Bank. (See
   Utah Administrative Rule R865-6F-8(10)(e)).

    Subsidiary will effectively be treated as having nexus in Utah because it is a
   

   member of a unitary group that has nexus in Utah. For reasons set out in our response to
   Question 7, we believe the Bank and Subsidiary are members of a unitary group and must
   file a combined return. Utah Administrative Rule R865-6F-32(15)(b) essentially
   employs the ‘Finnegan’ approach with respect to the sales and receipts factor and,
   therefore, if any financial institution member of a unitary group has nexus in Utah, the
   sales and receipts from each financial institution are attributable to Utah to the extent
   provided under the attribution rules of the above Utah administrative rule. Therefore, for
   purposes of attributing sales to the Utah sales numerator of the receipts factor, it is not
   necessary to make a Utah nexus determination with respect to each of the members of the
   unitary group so long as at least one entity within the unitary group has Utah nexus.

4. If you determine that the LLC and/or sub 1 have nexus in your state, permit
   the LLC and/or sub 1 to enter into a voluntary disclosure agreement to file
   either the appropriate Utah Partnership and/or Utah corporation Franchise
   or Income Tax Returns, respectively, and pay the tax for calendar years 2004
   through 2006, plus the current year; and that you agree to waive all penalties
   related to these returns and agree to not require our client to file tax returns
   for any tax years prior to those specified in the VDA.

Page 11

    The Tax Commission is willing to enter into a voluntary disclosure agreement

allowing the Bank and Subsidiary to file Utah corporation franchise tax returns on a
combined unitary basis for years 2004 through 2006 and beyond and to waive all
penalties associated with earlier years. The Tax Commission is willing to forgive tax
due, if any, from pre-2004 years in exchange for the above returns and the Bank’s
agreement to file prospectively, assuming no significant change in facts or Utah
statutes/case law determinations affecting current taxation policies.

5. If you determine that (based on the facts contained in the Attachment) that
   the Bank, Sub 1 and/or LLC do not have income tax nexus in your state,
   please provide a written ruling or other binding document that states that
   based on the facts as presented, stating that the Bank, Sub 1 and/or the LLC
   do not have nexus and are not subject to your state’s income tax.

   Since we have determined that the Bank and Subsidiary have nexus in Utah, and
   that LLC’s income and factors flow through pro rata to the Bank and Subsidiary, this
   question is moot.

6. Similarly to #5 above, if you determine that it is uncertain whether or not the
   Bank, Sub 1 and/or LLC have nexus in your state, our client may be willing
   to consider filing returns on a prospective basis, in exchange for your
   agreement to decide any uncertainly as to potential nexus during those prior
   years in their favor.

   Since we have determined that the Bank and Subsidiary have nexus in Utah, and
   that LLC’s income and factors flow through pro rata to the Bank and Subsidiary, this
   question is moot

7. In addition, please advise us of the availability or requirement of our client to
   file a combined or consolidated return in your state. If combined or
   consolidated filing is permitted, but not required, our client requests that it
   be granted the option of electing to file a Utah corporation combined or
   consolidated tax return should they choose to do so.

   Based on the information provided, it appears that the activities of the Bank,
   

   Subsidiary and LLC are interrelated, and integrated and therefore would meet the Utah
   definition of a unitary business. Utah’s unitary requirements are found in Utah Code
   Ann. §59-7-101(28)(a), which provides as follows:

   (28)(a) “Unitary group” means a group of corporations that:
   (i) are related through common ownership; and
   (ii) by a preponderance of the evidence as determined by a court of
   competent jurisdiction or the commission, are economically
   interdependent with one another as demonstrated by the
   following factors:

Page 12

                  (A) centralized management;
                  (B) functional integration; and
                  (C) economies of scale.

From the facts presented, we conclude that the Bank and Subsidiary are members of a
unitary group. Therefore, the Bank and Subsidiary are required to file a Utah combined
water’s edge report under UCA § 59-7-402. The income of LLC, and its apportionment
factors, will flow through pro rata to the Bank and Subsidiary on the combined return.
(The Bank does have the option to file a worldwide combined report under UCA §59-7-

403. That election, once made, may only be revoked with the consent of the
     commission.)

404. Our client activities in Utah are limited to those performed by non-employee
     agents or representatives; therefore our client is not requesting voluntary
     disclosure for any other types of taxes, as they believe they are only
     potentially liable for corporate income taxes.

Pursuant to your request, the voluntary disclosure agreement will be limited to corporate
income and franchise tax.

9. For years after 1999, our client has neither withheld nor collected any types
   of taxes.

   Our agreement to enter into a voluntary disclosure agreement is based, in part, on
   your representation that neither the Bank, Subsidiary, nor LLC withheld or collected any
   types of taxes.

   On receipt of this letter, please contact AGENCY REP by telephone at ###-

   -####, by e-mail at EMAIL ADDRESS, or by mail at ADDRESS, to formalize the

   voluntary disclosure agreement.

For the Commission,

Marc B. Johnson
Commissioner

07-010
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