Does an out-of-state company distributing satellite television programming to Utah bars, hotels, and nightclubs have Utah corporate franchise tax nexus, and are its receipts included in Utah's sales apportionment factor?

Plain-English summary

A law firm asked the Commission to rule on the Utah corporate franchise tax treatment of a Texas-based client that distributes satellite-delivered television programming to Utah commercial establishments (nightclubs, sports bars, hotels) under three different arrangements: (1) ongoing subscription programming, (2) special one-off events, and (3) pay-per-view events -- each of which could be contracted in one of several ways: by phone/mail, through an independent third party, or through the company's own employee. The firm asked for the tax treatment of each combination, and whether any required a "Promoter's or Exhibitor's" license.

The Commission's Auditing Division (whose recommendation the Commission adopted) framed the analysis around two separate questions: (1) does Utah have jurisdiction to tax the corporation at all (nexus), and (2) assuming yes, how are the receipts treated for Utah's sales apportionment factor?

• All the contract-negotiation variations produce the SAME answer, because they all boil down to the same underlying activity: delivering a satellite television signal. The manner of contracting is irrelevant to the tax analysis.
• Nexus/jurisdiction: Public Law 86-272 -- the federal law that can shield an out-of-state company from state income tax based on solicitation activity -- applies only to sales of tangible personal property. Since this is a service (signal delivery), PL 86-272 provides no protection at all, regardless of how the contract is negotiated. The company is clearly transacting business with Utah customers, so Utah has jurisdiction to tax it.
• Apportionment/sourcing: Having nexus doesn't automatically mean revenue is counted in Utah's tax base. Under § 59-7-319 and Rule R865-6-8F(I)(6), receipts from services are sourced to Utah only if the income-producing activity is performed in Utah, or is performed both in and outside Utah with a greater proportion of the activity (by cost of performance) occurring in Utah. Here, the income-producing activity -- transmitting/delivering the satellite signal -- happens outside Utah (from the company's own out-of-state operations). There was no specific rule addressing satellite-signal transmission specifically.
• Conclusion: Utah has jurisdiction to tax the company, but under the statute and rules as they existed at the time, none of the company's satellite-programming revenue, property, or payroll needed to be included in Utah's apportionment numerators. The Commission noted this was a "relatively modern" business type the existing rules didn't clearly contemplate, that other states were considering new rules for this industry, and that Utah could adopt its own rule in the future that would change this outcome.

What this means for you

Out-of-state service providers (not selling tangible goods) doing business with Utah customers

Don't assume Public Law 86-272 protects you -- it only covers sales of tangible personal property. If you're providing a service (signal delivery, remote services, licensing, etc.), Utah's nexus analysis proceeds without that federal shield, regardless of how lightly you're "soliciting" business in the state.

Companies delivering signals, data, or other intangible services into Utah

Even with Utah nexus, your receipts aren't automatically Utah-sourced for apportionment purposes -- what matters is WHERE the income-producing activity itself takes place (or, if split, where the greater cost of performance occurs), not where the customer receiving the signal/service is located. This can mean nexus without meaningful Utah tax liability, at least under the cost-of-performance sourcing method.

Accountants advising media, telecom, or remote-service businesses

This 1993 ruling is a useful historical snapshot of Utah's cost-of-performance approach to service sourcing before market-based sourcing reforms (which many states later adopted) -- confirm whether Utah's current sourcing rule still uses cost-of-performance or has since shifted to a market-based approach, since the Commission itself flagged this area as likely to change.

Common questions

Q: Does Public Law 86-272 protect an out-of-state service provider from Utah corporate franchise tax?
A: No, per this ruling -- PL 86-272 applies only to sales of tangible personal property, not to services like satellite signal delivery.

Q: Does the way a service contract is negotiated (phone, independent agent, employee) change the tax outcome?
A: No, per this ruling -- since PL 86-272 doesn't apply to services in the first place, contract-negotiation method makes no difference to nexus or sourcing.

Q: If a company has Utah nexus, does all its revenue automatically get taxed by Utah?
A: No, per this ruling -- nexus (jurisdiction to tax) and apportionment (how much revenue is actually assigned to Utah) are two separate questions; here jurisdiction existed but the receipts weren't Utah-sourced under the cost-of-performance rule.

Q: Where is a service's income-producing activity considered to occur?
A: Per the rule applied in this ruling (as it existed in 1993), it's sourced to where the activity generating the income is actually performed, or where the greater cost of performance occurs if split across states -- not necessarily where the customer is located.

Q: Can another out-of-state service business rely on this ruling today?
A: Not automatically -- it binds the Commission only for the taxpayer and facts presented, is now decades old, and the Commission itself noted Utah's rules for this type of business could change. Verify Utah's CURRENT sourcing methodology (cost-of-performance vs. market-based) before relying on this framework.

Citations and references

Statutes:

• Utah Code Ann. § 59-7-319 (sources receipts from sales other than tangible personal property to Utah if the income-producing activity is performed in Utah, or predominantly in Utah by cost of performance)

Rules:

• Utah Admin. Rule R865-6-8F(I)(6) (implementing the cost-of-performance sourcing standard)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/93-001.pdf

Original ruling text

Response February 9,
1993

Request

January 7, 1993

UTAH STATE TAX
COMMISSION

160 E. 300 S. HEBER
WELLS BUILDING

SALT LAKE CITY,
UT 84134

RE: REQUEST FOR RULING OR INFORMATION

Dear Sir or Madam:

This letter is being
written requesting information and/or a ruling on the certain issues affecting
a client. Our client (�Client�) is
located in Texas and wishes to provide the following services to commercial
establishments (�Establishment�) located in your state. Such locations may be Nightclubs, Sports
Bars, Hotels, etc. IN all cases, the
event being distributed/sold is a satellite delivered television signal.

ISSUE 1: SUBSCRIPTION PROGRAMS

The Client, owns the
rights to certain entertainment programs which he wishes to distribute to local
establishments. The establishment will
contract with the Client to provide such programming via satellite. The Establishments will be required to pay
an annual or quarterly subscription fee for this service. There may be three different ways of
arranging this service, please comment on each (and provide other relevant
information which you deem necessary):

(A) The contract is made and consummated by
telephone or mail.

(B) The contract is negotiated and consummated
by an independent third party, not on the Client�s payroll.

(C) The contract is negotiated and consummated
by an employee of the Client.

ISSUE 2: SPECIAL EVENTS

The Client owns the rights
to certain special events such as a sporting event which the Establishment
wishes to broadcast into his location for the benefit of his patrons. The Establishment will pay to Client a fixed
fee for said special event. At the
Establishment�s option the programming will be offered free to patrons or will
be included in the �cover charge� normally charged by the Establishment.

(A) The contract is made and consummated by
telephone or mail.

(B) The contract is negotiated and consummated
by an independent third party, not on the Client�s payroll.

(C) The contract is negotiated and consummated
by an employee of the Client.

(D) A separate, one time �access fee� is billed
to the Establishment to enable the Establishment�s decoder to receive the
signal.

ISSUE 3: PAY PER VIEW EVENTS

The Client owns the
rights to certain major sporting events which are offered to the Establishment
on a Pay-Per-View basis. The
Establishment will remit a portion of the amount collected or expected to be
collected from its patrons from the special viewing of the event. The Establishment will charge a special
price to the patrons when showing this even.

(A) The
contract is made and consummated by telephone or mail.

(B) The
contract is negotiated and consummated by an independent third party, not on
the Client�s payroll.

(C) The
contract is negotiated and consummated by an employee of the Client.

(D) A
separate, one time �access fee� is billed to the Establishment to enable the
Establishment�s decoder to receive the signal.

On each of the above situations, please provide your
riling of the tax responsibilities of the Client. Furthermore, do any of the above situations require the Client to
obtain a �Promoter�s or Exhibitor�s� license?

Thank you for your prompt attention to this matter.

Sincerely,

XXXXX

TO: XXXXX, Director

FROM: XXXXX, Secretary

DATE: XXXXX

SUBJECT: Request for Ruling or Information - No.
93-001DJ

Attached is a request
for information and/or ruling from XXXXX.
Will you please review the request of XXXXX regarding a client who is
located in Texas and wishes to provide services to commercial establishments
located in Utah.

Please prepare the
response for signature by the Commission as per the guidelines established by
them.

Thank you.

XXXXX

Re: Request for ruling
regarding satellite delivered television signals to establishments located in
Utah

Dear XXXXX:

This letter is in
response to your XXXXX request for a ruling regarding the taxability for Utah
corporation franchise tax purposes, of a corporation providing a satellite
delivered television signal to customers in Utah. This matter involves the providing of services to customers in
Utah from outside this state in contrast to the sale of tangible property,
which is generally governed by the provisions of Public Law 86-272.

The Tax Commission
policy is to refer such requests to the division most qualified to analyze the
request and make recommendations concerning it. As such, your request was referred to the Tax Commission�s
Auditing Division for their analysis and recommendation. The division�s recommendation is as follows:

The subject of this
advisory opinion is �sales, other than sales of tangible personal property�
which is covered under U.C.A. 59-7-319.
In this type of matter there are generally two distinct determination
which must be made. This first is
whether the state has jurisdiction to tax the particular corporation in the
first instance (i.e. does such corporation have nexus with the taxing
state?). The second question is,
assuming that jurisdiction to tax is present, how are such gross receipts or
sales to be treated for purposes of the Utah sales numerator?

The format of your
request includes three separate but related issues with several alternative
possibilities as to how the contract may be negotiated. All three issues involve alternatives in
types of programs or contracts between the parties. However, all of the above programs or contracts involve the same
basic matter which is the delivery of the satellite television signal. Therefore, our determination as to the
taxability of the three different issues will be the same regardless of how the
contract is negotiated.

Since Public Law
86-272 applies only to the sale of tangible personal property, the manner in
which such contract is negotiated will be irrelevant in the determination as to
taxability of the corporation in Utah or how such receipts are treated for
purposes of the Utah sales factor of the three-factor apportionment
formula. Therefore, the corporation
would either be subject to the tax in all alternatives or not be subject to tax
in any of the alternatives. In other
words, the focal point in this determination is the delivery of the signal to
the Utah customer rather than the form of the contract for such delivery.

JURISDICTION TO TAX

The client is clearly
transacting business with a Utah customer and there is no preclusion on the
state from asserting its tax since this is not a sale of tangible personal
property governed by Public Law 86-272.
Therefore, Utah has jurisdiction to tax the client.

APPLICATION OF UTAH
SALES FACTOR

The amounts of sales
other than the sales of tangible personal property includable in the Utah sales
and receipts factor are controlled by U.C.A. 59-7-319 and Utah Administrative
Rule R865-6-8F(I)(6). The above statute
provides that such sales are in this state if:
(1) the income- producing activity is performed in this state; or (2)
the income-producing activity is performed both in and outside this state and a
greater proportion of the income-producing activity is performed in this state
than in any other state, based on the costs of performance. There is no specific provision in the code
or rules relating to the transmission of a satellite delivered television
signal into the state of Utah. Under
the alternatives presented in your letter the income-producing activity is
being performed outside of Utah and under current statute and rule, none of the
revenues are assignable to the Utah sales numerator.

CONCLUSION

Based on the above
rationale, although Utah clearly has jurisdiction to tax a corporation engaged
in delivering the television signal via satellite into this state, current
statutes and rules do not require such a corporation to file and include the
revenues or any of the property or payroll in the Utah numerators of the XXXXX
apportionment formula at this time. The
type of business engaged in by your client is relatively modern and the statute
as written did not appear to contemplate the types of issues and concerns
relating to this enterprise. A number
of states are considering new rules which will potentially change current
practice and deal with the unique concerns of this type of industry. Utah does not currently have any proposed
rules being considered relating to this area.
However, the possibility exists that a rule could be adopted in the
future which would change the Utah requirements for this industry.

Based upon the facts
presented in your letter, we are in agreement with the Auditing Division�s
recommendations. Obviously, if there
are deviations from these facts, this opinion may be negated.

If you do not agree with
this determination, you may appeal to the Tax Commission for a formal
hearing. The results of that hearing
would constitute a declaratory judgment and be appealable to the Utah State
Supreme Court. A Notice of Appeal
Rights and a copy of the Utah Taxpayer Bill of Rights are attached. In addition, if you have additional
questions or need additional clarification, please contact XXXXX of the
Auditing Division (telephone XXXXX).

In contacting the Tax Commission,
if special accommodations are needed in accordance with the Americans with
Disabilities Act, please call (801) 530-6920, (801) 530-6077 or TDD (801)
530-6269 allowing three working days notice.

For the Commission,

Joe B. Pacheco

Commissioner