Which out-of-state gross receipts, business and occupation, and city/county business taxes have to be added back to income when computing Utah corporate franchise tax?

Plain-English summary

A multistate company's corporate tax manager wrote to the Utah State Tax Commission confused about Utah's "add-back" rule for the corporate franchise tax return -- the instructions required certain out-of-state taxes (value-added taxes, single business taxes, gross-income/gross-receipts-based taxes, and capital stock taxes) to be added back to the Utah taxable base, even though other states didn't require the same add-back. The company asked for a specific ruling on seven different taxes it paid around the country: gross receipts taxes in two states that the company argued were really pass-through sales-tax equivalents (charged as separate line items directly to its own clients, so they were a "wash" that didn't actually reduce the company's own taxable income); a state Business and Occupation tax that, unlike those two, operated in lieu of a regular income tax; and four different city- or county-level taxes (business and occupation tax, two business license taxes, and a business tax certificate fee).

The Commission's answer sorted the seven taxes into three buckets under Utah Code § 59-7-105(2)(b), which requires adding back amounts deducted on the federal return for taxes paid "to another STATE" for the privilege of doing business or exercising a corporate franchise -- including income, franchise, corporate stock, and business and occupation taxes:

1. City and county taxes are never added back, categorically. The statute's language reaches only taxes paid to a state, not to a city or county. So the city-level Business and Occupation Tax, the two business license taxes (city and county), and the city Business Tax Certificate Fee were all excluded from add-back -- regardless of what they were based on (gross income, a flat license fee, etc.) -- simply because they weren't state-level taxes.
2. State-level gross receipts taxes that function as pass-through sales/use tax equivalents are excluded. The Commission agreed with the company's own characterization: because these two taxes were directly charged to and collected from the company's clients as separate line items (rather than absorbed into the company's own income), they were equivalent to sales and use taxes and didn't fall into the add-back category under § 59-7-105(2)(b), even though they were technically state-level and gross-receipts-based.
3. A state tax that substitutes for an income tax must be added back. The one state Business and Occupation Tax that operated "in lieu of" a regular corporate income tax -- rather than being passed through to customers -- squarely fit the statute's add-back category, since it's functionally an income/franchise-type tax on the company's own business activity, just labeled differently.

So of the seven taxes examined, only that one true income-tax-substitute Business and Occupation Tax required an add-back to Utah adjusted income; the other six -- the two pass-through gross receipts taxes and the four city/county taxes -- did not.

What this means for you

Multistate companies preparing a Utah corporation franchise tax return

Don't assume every out-of-state tax based on gross income or gross receipts triggers Utah's add-back. This ruling draws two separate lines: first, only STATE-level taxes are even in scope (city and county taxes never trigger add-back under this statute); second, even among state-level gross-receipts-type taxes, ones that function as a pass-through equivalent to sales tax (billed directly to your own customers as a separate line item) are treated differently from taxes that genuinely substitute for an income tax on your own business.

Businesses that separately itemize and pass through a gross receipts tax to customers

How you actually bill the tax matters. The Commission's analysis leaned heavily on the fact that the two excluded gross receipts taxes were charged to the company's clients as a distinct line item, making the arrangement a "wash" for the company's own taxable income -- similar to how a retailer passes on sales tax. If your company instead absorbs a similar tax into overhead and bills clients an all-in rate (as the ruling contrasts with a different state's income tax example), that tax is more likely to be treated as a genuine cost of doing business subject to add-back.

Accountants and tax professionals preparing multistate add-back schedules

This ruling is a useful template for sorting a client's various state and local tax payments into the three buckets described here (city/county = never added back; state pass-through gross receipts = not added back; state income-tax substitute = added back). Note the internal typo in one of the two response letters (citing "Section 59-8-105(2)" instead of the correct § 59-7-105(2)(b) used elsewhere in the same ruling) -- both letters otherwise quote identical statutory language and reach identical conclusions.

Common questions

Q: Are city or county business taxes ever added back for Utah corporate franchise tax purposes?
A: No, according to this ruling -- § 59-7-105(2)(b) only reaches taxes paid to a state, so city- and county-level taxes are categorically excluded from the add-back, regardless of how they're structured.

Q: Is every out-of-state gross receipts tax added back?
A: Not necessarily. A gross receipts tax that's really a pass-through equivalent to sales tax -- charged directly to your own customers as a separate line item rather than absorbed as your own income -- was excluded from add-back in this ruling, even though it was a state-level tax.

Q: What kind of out-of-state tax does get added back?
A: A state-level tax that operates "in lieu of" a regular income tax -- i.e., a genuine substitute for taxing the company's own business income or franchise -- falls within the statute's add-back requirement.

Q: Does this ruling apply to my company's specific out-of-state taxes?
A: Not automatically. It's a private letter ruling binding only on the Commission for the taxpayer and the seven specific taxes described, and how a given state's tax actually operates (pass-through vs. income-tax substitute) is a fact-specific question. Consult a Utah tax professional and verify current statute numbering.

Citations and references

Statute (1995-era numbering -- since renumbered/amended):

• Utah Code Ann. § 59-7-105(2)(b) (1995) (add-back of certain state-level privilege/franchise-type taxes in computing Utah adjusted income; one response letter in this ruling cites it as "Section 59-8-105(2)," which appears to be a typo)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/95-078.htm

Original ruling text

95-078

Responses
September 1, 1995 and October 24, 1995

Request

Utah
State Tax Commission

Heber
M. Wells Building

160
East 300 South

Salt
Lake City, Utah 84134300

SUBJECT:
QUESTIONS ABOUT THE ADD-BACK FOR STATE TAXES

We
have attached the instructions from page 6 of the Corporation Franchise or Income
Tax Return and Instructions. Line 1 of
these instructions discusses the add-backs to the taxable base for expenses
related to rates. For example,
value-added taxes, single business taxes, taxes that are based on gross income,
or gross receipts, and capital stock taxes are all added back in Utah but not
other states. Our research of Utah's
laws leaves us confused. We need your
clarification about various state taxes that our company pays in other parts of
the country. The purpose of this letter
is to provide you with information about taxes that we pay in other states and
request that you specifically rule whether this is the type of tax that has to
be added back to the Utah tax base or not.

We
are particularly interested in the state of XXXXX and XXXXX. Although their taxes are based on a gross
receipts, they do not add to the net income of our company. This is because these are direct taxes,
meaning that the service recipient (our clients) are directly charged this tax
as separate line item on our bills to them.
Thus, although XXXXX initially pays the tax, it is a taxable income wash
since the client must then pay us back for the tax. This is not unique to our company in that virtually all companies
that bill clients for any type of service or product charge (pass on) the XXXXX
and XXXXX Gross Receipts tax to their customers. These taxes are so much like sales taxes, that they are
effectively treated as a sales tax and therefore, should not be added back to
our 1994 Utah tax base since they do not impact taxable income (or in the
alternative, if they have to be added back, the income from the billings to our
customers for these direct taxed should be exempt).

We
note the XXXXX and XXXXX tax are not �substitute� taxes for other income taxes
by these states. For example, XXXXX and
XXXXX both have separate corporate income taxes as well as these directly
client chargeable gross receipt taxes.
This is quite different than, for example, the State of XXXXX, where the
XXXXX Business and Occupation tax is in lieu of an income tax. In the State of XXXXX, the income tax is not
directly passed on to clients (unlike the XXXXX and XXXXX tax). Therefore, the
XXXXX tax is passed on vis-a-vis overhead rate charges to clients as reflected
in overhead billing rates, not as separate and direct line items on the bills
to clients.

To
help in your analysis, we have attached specific information form either XXXXX
or the applicable State or City itself.
We request that you specifically rule as to whether the relative tax
must be added back to the Utah taxable income base.

In
addition to the two states named, we are also very concerned about the State of
XXXXX and various City taxes which may be based on gross income but are often a
license tax or a privilege- to-do-business tax, or a capital
stock tax, etc.,). Many of these are
city, not state level taxes. Therefore,
please find information regarding the following locations (which are meant to be
a sample of the type of taxes our company pays):

1.
XXXXX

2.
XXXXX

3.
XXXXX State Business and Occupational Tax (state level)

4.
XXXXX Business and Occupational Tax (city level)

5.
XXXXX, Business License Tax (city level)

6.
XXXXX Business License Tax (county level)

7.
XXXXX, City Business Tax Certificate Fee (city level)

With
this information, we hope to 1) receive specific rulings on the above
locations, and 2) to be able to use these rulings as a guide for the other
locations that this company files taxes in.
Again, we strongly believe that the taxes that are a taxable income wash
(i.e., they are paid by us but are directly charged and collected from our
clients--similar to sales tax) should not be subject to the add-back (for
example, XXXXX and XXXXX). We also believe
that local taxes that are either a fee or a license, even though based on gross
income or gross receipts should not be added to the tax base. If you have any questions, please do not
hesitate to call.

Sincerely,

XXXXX

Manager
of Corporate Taxes

XXXXX

Re: Advisory opinion on whether certain state
and local taxes are required to be added back for purposes of determining
adjusted income for purposes of the Utah corporation franchise tax statute.

Dear
XXXXX

You
requested an advisory opinion as to whether seven specific taxes imposed by
various

state
or local taxing jurisdictions are required to be added back pursuant to Section
59-7-105(2)

of
the Utah Code, for purposes of determining Utah adjusted income. These taxes include the

XXXXX
Gross Receipts Tax, the XXXXX General Excise/Use Tax, the XXXXX state

Business
and Occupation Tax, the XXXXX (City) Business and Occupation Tax, the

XXXXX
(City) Business License Tax, the XXXXX County, XXXXX (County) Business

License
Tax and the XXXXX (City) Business Tax Certificate Fee.

Our
research indicates as follows:

Section
59-7-105(2)(b) of the Utah code provides that amounts deducted on a federal
corporation income tax return for taxes paid . . . �to another state of the
United States, a foreign country, a United States possession, or the
Commonwealth of XXXXX, for taxes imposed for the privilege of doing business,
or exercising its corporation franchise, including income, franchise, corporate
stock and business and occupation taxes,� shall be added back in the
calculation of Utah adjusted Income.

The
statute does not provide for any add-back of taxes paid at the city or county
level but rather taxes paid �...to another state...� Therefore, the Utah statute does not require an add-back for the
XXXXX (City) Business and Occupation Tax, the XXXXX (City) Business License
Tax, the XXXXX (County) XXXXX Business License Tax and the XXXXX (City)
Business Certificate Fee.

The
Utah statute clearly does require an add-back for the XXXXX state Business and
Occupation Tax which as pointed out in your letter, is a tax in lieu of an
income tax. Please be advised that the
Utah State Tax Commission does not consider the XXXXX Gross Receipts Tax and
the XXXXX General Excise/Use Tax, which as you pointed out in your letter are
equivalent to sales and use taxes directly passed on to the consumer, to be in
the category of taxes which are to be added back under U.C.A. 59-7-105(b).

Therefore,
of the seven individual taxes mentioned in your letter, only the XXXXX Business
and Occupation Tax falls into the category of taxes that must be added back in
arriving at Utah adjusted income.

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 judgement 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.

Respectfully,

Alice
Shearer

Commissioner

XXXXX

RE:
Advisory Opinion Requirements to add back certain state and local taxes to
adjusted income for purposes of Utah corporation and franchise tax.

Dear
XXXXX

You
requested an advisory opinion as to whether seven specific taxes imposed by
various state or local taxing jurisdictions must be added back to determine
Utah adjusted income pursuant to Section 59-8-105(2) of the Utah Code. The taxes in question include the XXXXX
Receipts Tax, the XXXXX, the XXXXX Business and Occupation Tax, the XXXXX
(City) Business and Occupation Tax, the XXXXX (City) Business License Tax, the
XXXXX (County) Business License Tax and the XXXXX (City) Business Tax
Certificate Fee. Our research indicates
the following:

Section
59-7-105(2)(b) of the Utah Code provides that amounts deducted on a federal
corporation income tax return for taxes paid �to another state of the United
States, a foreign country, a United States possession, or the XXXXX, for taxes
imposed for the privilege of doing business, or exercising its corporation
franchise, including income, franchise, corporate stock and business and
occupation taxes� shall be added back in the calculation of Utah adjusted
income. Our statute does not provide
for any add back of taxes paid to city or county entities. Therefore, the Utah statute does not require
an add back of the XXXXX Business and Occupation Tax, the XXXXX Business
License Tax, the XXXXX Business License Tax and the XXXXX Business Certificate
Fee. We do not consider the XXXXX Gross
Receipts Tax or the XXXXX General Excise/Use Tax, which are equivalent to sales
and use taxes directly passed on to the consumer, to be in the category of
taxes added back under section 59-7-105.
The Utah statute clearly does require an add back for the XXXXX State
Business and Occupation Tax which, as pointed out in your letter, is a tax in
lieu of an income tax.

Let
us know if we can be of further assistance.

For
the Commission,

Alice
Shearer

Commissioner