075 Multistate Allocation and Apportionment

PURPOSE: This rule represents the methods to be used in allocating and apportioning income to Missouri under that part of Chapter 32, RSMo which is commonly known as the Multistate Tax Compact. (1) Authority for Rule. This rule is being issued under the general regulatory powers granted to the director of revenue in section 143.961, RSMo which became effective January 1, 1973, and in accordance with subsection 3 of article VII of the Multistate Tax Compact, section 32.200, RSMo. (2) Applicability and Scope of Rule. This rule is intended as an interpretive guideline in the application of Article VI of the Multistate Tax Compact, section 32.200, RSMo, implemented by adopting the Multistate Tax Commission’s allocation and apportionment regulations which were adopted by the commission February 21, 1973. The apportionment rules set forth in this rule are applicable to any taxpayer having business income, regardless of whether or not it has nonbusiness income, and the allocation rules set forth in this rule are applicable to any taxpayer having nonbusiness income, regardless of whether or not it has business income. The numerical references contained in this rule are to Article IV of the Multistate Tax Compact, section 32.200, RSMo, and its subsections. The only exceptions to the allocation and apportionment rules contained in this rule are those set forth in sections (63)–(66) of this rule under the authority of Article IV.18. of the Multistate Tax Compact, section 32.200, RSMo. This rule is not intended to modify existing regulations concerning jurisdictional standards. (3) As used in this rule, the term director of revenue shall mean the director of revenue or his/her duly authorized agent or designee. (4) Business and Nonbusiness Income. Section 32.200 (Article IV.1.), RSMo defines business income as income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations. In essence, all income which arises from the conduct of trade or business operations of a taxpayer is business income. For purposes of administration of section 32.200 (Article IV), RSMo, the income of the taxpayer is business income unless clearly classifiable as nonbusiness income. Nonbusiness income means all income other than business income. The classification of income by the labels occasionally used, such as manufacturing income, compensation for services, sales income, interest, dividends, rents, royalties, gains, operating income, nonoperating income, and the like, is of no aid in determining whether income is business or nonbusiness income. Income of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of a trade or business. Accordingly, the critical element in determining whether income is business income or nonbusiness income is the identification of the transactions and activity which are the elements of a particular trade or business. In general all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer’s economic enterprise as a whole constitute the taxpayer’s trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business. (5) Business and Nonbusiness Income—Ap­plication of Definitions. The following are rules and examples for determining whether particular income is business or nonbusiness income (The examples used throughout this rule are illustrative only and do not purport to set forth all pertinent facts.): (A) Rents From Real and Tangible Personal Property. Rental income from real and tangible property is business income if the property with respect to which the rental income was received is used in the taxpayer’s trade or business, or incidental to the trade or business and therefore is includable in the property factor under sections (21)–(24) of this rule. 1. Example: The taxpayer operates a multistate car rental business. The income from car rentals is business income. 2. Example: The taxpayer is engaged in the heavy construction business in which it uses equipment such as cranes, tractors and earth-moving vehicles. The taxpayer (6/30/24) John R. Ashcroft DIVISION 10—DIRECTOR OF REVENUE 12 CSR 10-2—DEPARTMENT OF REVENUE makes short-term leases of the equipment when particular pieces of equipment are not needed on any particular project. The rental income is business income. 3. Example: The taxpayer operates a multistate chain of men’s clothing stores. The taxpayer purchases a five (5)-story office building for use in connection with its trade or business. It uses the street floor as one (1) of its retail stores and the second and third floors for its general corporate headquarters. The remaining two (2) floors are leased to others. The rental of the two (2) floors is incidental to the operation of the taxpayer’s trade or business. The rental income is business income. 4. Example: The taxpayer operates a multistate chain of grocery stores. It purchases as an investment an office building in another state with surplus funds and leases the entire building to others. The net rental income is not business income of the grocery store trade or business. Therefore, the net rental income is nonbusiness income. 5. Example: The taxpayer operates a multistate chain of men’s clothing stores. The taxpayer invests in a twenty (20)- story office building and uses the street floor as one (1) of its retail stores and the second floor for its general corporate headquarters. The remaining eighteen (18) floors are leased to others. The rental of the eighteen (18) floors is not incidental to but rather is separate from the operation of the taxpayer’s trade or business. The net rental income is not business income of the clothing store trade or business. Therefore, the net rental income is nonbusiness income. 6. Example: The taxpayer constructed a plant for use in its multistate manufacturing business and twenty (20) years later the plant was closed and put up for sale. The plant was rented for a temporary period from the time it was closed by the taxpayer until it was sold eighteen (18) months later. The rental income is business income and the gain on the sale of the plant is business income. 7. Example: The taxpayer operates a multistate chain of grocery stores. It owned an office building which it occupied as its corporate headquarters. Because of inadequate space, taxpayer acquired a new and larger building elsewhere for its corporate headquarters. The old building was rented to an investment company under a five (5)-year lease. Upon expiration of the lease, taxpayer sold the building at a gain (or loss). The net rental income received over the lease period is nonbusiness income and the gain (or loss) on the sale of the building is nonbusiness income; (B) Gains or Losses From Sales of Assets. Gain or loss from the sale, exchange or other disposition of real or tangible or intangible personal property constitutes business income if the property while owned by the taxpayer was used in the taxpayer’s trade or business. However, if the property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange or other disposition, the gain or loss will constitute nonbusiness income. 1. Example: In conducting its multistate manufacturing business, the taxpayer systematically replaces automobiles, machines and other equipment used in the business. The gains or losses resulting from those sales constitute business income. 2. Example: The taxpayer constructed a plant for use in its multistate manufacturing business and twenty (20) years later sold the property at a gain while it was in operation by the taxpayer. The gain is business income. 3. Example: Same as paragraph (5)(B)2. of this rule except that the plant was closed and put up for sale but was not in fact sold until a buyer was found eighteen (18) months later. The gain is business income. 4. Example: Same as paragraph (5)(B)2. of this rule except that the plant was rented while being held for sale. The rental income is business income and the gain on the sale of the plant is business income. 5. Example: The taxpayer operates a multistate chain of grocery stores. It owned an office building which it occupied as its corporate headquarters. Because of inadequate space, taxpayer acquired a new and larger building elsewhere for its corporate headquarters. The old building was rented to an unrelated investment company under a five (5)-year lease. Upon expiration of the lease, taxpayer sold the building at a gain (or loss). The gain (or loss) on the sale is nonbusiness income and the rental income received over the lease period is nonbusiness income; (C) Interest. Interest income is business income where the intangible with respect to which the interest was received arises out of, or was created in, the regular course of the taxpayer’s trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to the trade or business operations. 1. Example: The taxpayer operates a multistate chain of department stores, selling for cash and on credit. Service charges, interest or time-price differentials and the like are received with respect to installment sales and revolving charge accounts. These amounts are business income. 2. Example: The taxpayer conducts a multistate manufacturing business. During the year the taxpayer receives a federal income tax refund and collects a judgment against a debtor of the business. Both the tax refund and the judgment bore interest. The interest income is business income. 3. Example: The taxpayer is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the taxpayer maintains special accounts to cover these items as Workers’ Compensation claims, rain and storm damage, machinery replacement, and the like. The moneys in those accounts are invested at interest. Similarly, the taxpayer temporarily invests funds intended for payment of federal, state and local tax obligations. The interest income is business income. 4. Example: The taxpayer is engaged in a multistate money order and traveler’s checks business. In addition to the fees received in connection with the sale of the money orders and traveler’s checks, the taxpayer earns interest income by the investment of the funds pending their redemption. The interest income is business income. 5. Example: The taxpayer is engaged in a multistate manufacturing and selling business. The taxpayer usually has working capital and extra cash totaling two hundred thousand dollars ($200,000) which it regularly invests in short-term interest bearing securities. The interest income is business income. 6. Example: In January, the taxpayer sold all the stock of subsidiary for twenty (20) million dollars. The funds are placed in an interest-bearing account pending a decision by management as to how the funds are to be utilized. The interest income is nonbusiness income; (D) Dividends. Dividends are business income where the stock with respect to which the dividends are received arises out of or was acquired in the regular course of the taxpayer’s trade or business operations or where the purpose for acquiring and holding the stock is related to or incidental to the trade or business operations. 1. Example: The taxpayer operates a multistate chain of stock brokerage houses. During the year the taxpayer receives dividends on stock it owns. The dividends are business income. John R. Ashcroft (6/30/24) 12 CSR 10-2—DEPARTMENT OF REVENUE DIVISION 10—DIRECTOR OF REVENUE 2. Example: The taxpayer is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the taxpayer maintains special accounts to cover such items as Workers’ Compensation claims, etc. A portion of the moneys in those accounts is invested in interest-bearing bonds. The remainder is invested in various common stocks listed on national stock exchanges. Both the interest income and any dividends are business income. 3. Example: The taxpayer and several unrelated corporations own all of the stock of a corporation whose business operations consist solely of acquiring and processing materials for delivery to the corporate owners. The taxpayer acquired the stock in order to obtain a source of supply of materials used in its manufacturing business. The dividends are business income. 4. Example: The taxpayer is engaged in a multistate heavy construction business. Much of its construction work is performed for agencies of the federal government and various state governments. Under state and federal laws applicable to contracts for these agencies, a contractor must have adequate bonding capacity, as measured by the ratio of its current assets (cash and marketable securities) to current liabilities. In order to maintain an adequate bonding capacity, the taxpayer holds various stocks and interest-bearing securities. Both the interest income and any dividends received are business income. 5. Example: The taxpayer receives dividends from the stock of its subsidiary or affiliate which acts as the marketing agency for products manufactured by the taxpayer. The dividends are business income. 6. Example: The taxpayer is engaged in a multistate glass manufacturing business. It also holds a portfolio of stock and interest-bearing securities, the acquisition and holding of which are unrelated to the manufacturing business. The dividends and interest income received are nonbusiness income; and (E) Patent and Copyright Royalties. Patent and copyright royalties are business income where the patent or copyright with respect to which the royalties were received arises out of or was created in the regular course of the taxpayer’s trade or business operations or where the purpose of acquiring and holding the patent or copyright is related to or incidental to the trade or business operations. 1. Example: The taxpayer is engaged in the multistate business of manufacturing and selling industrial chemicals. In connection with that business the taxpayer obtained patents on certain of its products. The taxpayer licensed the production of the chemicals in foreign countries, in return for which the taxpayer receives royalties. The royalties received by the taxpayer are business income. 2. Example: The taxpayer is engaged in the music publishing business and holds copyrights on numerous songs. The taxpayer acquires the assets of a smaller publishing company, including music copyrights. After these acquired copyrights are used by the taxpayer in its business, any royalties received on these copyrights are business income. 3. Example: Same as example in paragraph (5)(E)2. of this rule, except that the acquired company also held the patent on a type of phonograph needle. The taxpayer does not manufacture or sell phonographs or phonograph equipment. Any royalties received on the patent would be nonbusiness income. (6) Proration of Deductions. In most cases, an allowable deduction of a taxpayer will be applicable only to the business income arising from a particular trade or business or to a particular item of nonbusiness income. In some cases, an allowable deduction may be applicable to the business incomes of more than one (1) trade or business or to several items of nonbusiness income. In those cases, the deduction shall be prorated among the trades or businesses and the items of nonbusiness income in a manner which fairly distributes the deduction among the classes of income to which it is applicable. In filing returns with this state, if the taxpayer departs from or modifies the manner of prorating any of the deduction used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. If the return or reports filed by a taxpayer with all states to which the taxpayer reports under section 32.200 (Article IV), RSMo of this Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the application or proration of any deduction, the taxpayer shall disclose in its return to this state the nature and extent of the variance. (7) Taxpayer means any corporation, partnership, firm, association, governmental unit or agency or person acting as a business entity in more than one (1) state. (8) Apportionment refers to the division of business income between states by the use of a formula containing apportionment factors. (9) Allocation refers to the assignment of nonbusiness income to a particular state. (10) Business activity refers to the transactions and activity occurring in the regular course of a particular trade or business of a taxpayer. (11) Application of Article IV—Ap­portionment. If the business activity in respect to any trade or business of a taxpayer occurs both within and without this state and, if by reason of that business activity the taxpayer is taxable in another state, the portion of the net income (or net loss) arising from the trade or business which is derived from sources within this state shall be determined by apportionment in accordance with section 32.200 (Articles IV.9.–IV.17), RSMo. (12) Application of Article IV—Allocation. Any taxpayer subject to the taxing jurisdiction of this state shall allocate all of its nonbusiness income or loss within or without this state in accordance with section 32.200 (Articles IV.4.–IV.8), RSMo. (13) Consistency and Uniformity in Reporting. In filing returns with this state if the taxpayer departs from or modifies the manner in which income has been classified as business income or nonbusiness income in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by a taxpayer for all states to which the taxpayer reports under section 32.200 (Article IV), RSMo of the Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the classification of income as business or nonbusiness income, the taxpayer shall disclose in its return to this state the nature and extent of the variance. (14) Taxable in Another State—In General. Under section 32.200 (Article IV.2.), RSMo the taxpayer is subject to the allocation and apportionment provisions of section 32.200 (Article IV), RSMo if it has income from business activity that is taxable (6/30/24) John R. Ashcroft DIVISION 10—DIRECTOR OF REVENUE 12 CSR 10-2—DEPARTMENT OF REVENUE both within and without this state. A taxpayer’s income from business activity is taxable without this state if the taxpayer, by reason of the business activity (that is, the transaction and activity occurring in the regular course of a particular trade or business), is taxable in another state within the meaning of section 32.200 (Article IV.3.), RSMo. A taxpayer is taxable within another state if it meets either one (1) of two (2) tests— (A) If by reason of business activity in another state, the taxpayer is subject to one (1) of the types of taxes specified in section 32.200 (Article IV.3(1)), RSMo, namely, a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business or a corporate stock tax; or (B) If by reason of the business activity, another state has jurisdiction to subject the taxpayer to a net income tax, regardless of whether or not the state imposes this tax on the taxpayer. (15) Taxable in Another State—Nonbusiness Income Only. A taxpayer is not taxable in another state with respect to a particular trade or business merely because the taxpayer conducts activities in the other state pertaining to the production of nonbusiness income or business activities relating to a separate trade or business. (16) Taxable in Another State. A taxpayer is subject to one (1) of the taxes specified in section 32.200 (Article IV.3(1)), RSMo if it carries on business activities in the state and that state imposes the tax on business activities. Any taxpayer which asserts that it is subject to one (1) of the taxes specified in section 32.200 (Article IV.3(1)), RSMo in another state shall furnish to the director of revenue of this state, upon his/her request, evidence to support the assertion. The director of revenue of this state may request that the evidence include proof that the taxpayer has filed the requisite tax return in the other state and has paid any taxes imposed under the law of the other state; the taxpayer’s failure to produce proof that may be taken into account in determining whether the taxpayer in fact is subject to one (1) of the taxes specified in section 32.200 (Article IV.3(1)), RSMo in the other state. If the taxpayer voluntarily files and pays one (1) or more of the taxes when not required to do so by the laws of that state or pays a minimal fee for qualification, organization or for the privilege of doing business in the state, but does not actually engage in business activity in that state, or does actually engage in some business activity, not sufficient for nexus, and the minimum tax bears no relation to the taxpayer’s business activity within that state, the taxpayer is not subject to one (1) of the taxes specified within the meaning of section 32.200 (Article IV.3(1)), RSMo. Example: State A has a corporation franchise tax measured by net income, for the privilege of doing business in that state. Corporation X files a return and pays the fifty-dollar ($50) minimum tax, although it carries on no business activity in State A. Corporation X is not taxable in State A. (17) Taxability. The concept of taxability in another state is based upon the premise that every state in which the taxpayer is engaged in business activity may impose an income tax even though every state does not do so. In states which do not, other types of taxes may be imposed as a substitute for an income tax. Therefore, only those taxes enumerated in section 32.200 (Article IV.3(1)), RSMo which may be considered as basically revenue raising rather than regulatory measures shall be considered in determining whether the taxpayer is subject to one (1) of the taxes specified in section 32.200 (Article IV.3(1)), RSMo in another state. (A) Example: State A requires all nonresident corporations which qualify or register in State A to pay to the secretary of state an annual license fee or tax for the privilege of doing business in the state regardless of whether the privilege is in fact exercised. The amount paid is determined according to the total authorized capital stock of the corporation; the rates are progressively higher by bracketed amounts. The statute set a minimum fee of fifty dollars ($50) and a maximum fee of five hundred dollars ($500). Failure to pay the tax bars a corporation from utilizing the state courts for enforcement of its rights. State A also imposes a corporation income tax. Nonresident Corporation X is qualified in State A and pays the required fee to the secretary of state but does not carry on any business activity in State A (although it may utilize the courts of State A). Corporation X is not taxable in State A. (B) Example: Same facts as in subsection (17)(A) of this rule except that Corporation X is subject to and pays the corporation income tax. Payment is prima facie evidence that Corporation X is subject to the net income tax of State A and is taxable in State A. (C) Example: State B requires all nonresident corporations qualified or registered in State B to pay to the secretary of state an annual permit fee or tax for doing business in the state. The base of the fee or tax is the sum of outstanding capital stock, surplus and undivided profits. The fee or tax base attributable to State B is determined by a three (3)-factor apportionment formula. Nonre­sident Corporation X which operates a plant in State B pays the required fee or tax to the secretary of state. Corporation X is taxable in State B. (D) Example: State A has a Corporation franchise tax measured by net income for the privilege of doing business in that state. Corporation X files a return based upon its business activity in the state but the amount of computed liability is less than the minimum tax. Corporation X pays the minimum tax. Corporation X is subject to State A’s corporation franchise tax. (18) Taxable in Another State. The second test, that of section 32.200 (Article IV.3(2)), RSMo, applies if the taxpayer’s business activity is sufficient to give the state jurisdiction to impose a net income tax by reason of the business activity under the Constitution and statutes of the United States. Jurisdiction to tax is not present where the state is prohibited from imposing the tax by reason of the provisions of P.L. 86-272, 15 U.S.C.A. Sections 381–385. In the case of any state as defined in section 32.200 (Article IV.1(8)), RSMo, other than a state of the United States or political subdivision of that state, the determination of whether that state has jurisdiction to subject the taxpayer to a net income tax shall be made as though the jurisdictional standard applicable to a state of the United States applies in that state. If jurisdiction is otherwise present, that state is not considered as without jurisdiction by reason of the provisions of a treaty between that state and the United States. Example: Corporation X is actively engaged in manufacturing farm equipment in State A and in Foreign Country B. Both State A and Foreign Country B impose a net income tax but Foreign Country B exempts corporations engaged in manufacturing farm equipment. Corporation X is subject to the jurisdiction of State A and Foreign Country B. (19) Apportionment Formula. All business income of each trade or business of the taxpayer shall be apportioned to this state by use of the apportionment formula set forth in 32.200 (Article IV.9), RSMo. The elements of the apportionment formula are the property factor (see sections (20)–(24) of this rule), the payroll factor (see sections (34)–(41) of this rule) and the sales John R. Ashcroft (6/30/24) 12 CSR 10-2—DEPARTMENT OF REVENUE DIVISION 10—DIRECTOR OF REVENUE factor (see sections (42)–(46) of this rule) of the trade or business of the taxpayer. (20) Property Factor—In General. The property factor of the apportionment formula for each trade or business of the taxpayer shall include all real and tangible personal property owned or rented by the taxpayer and used during the tax period in the regular course of that trade or business. The term real and tangible personal property includes land, buildings, machinery, stocks of goods, equipment and other real and tangible personal property but does not include coin or currency. Property used in connection with the production of nonbusiness income shall be excluded from the property factor. Property used both in the regular course of taxpayer’s trade or business and in the production of nonbusiness income shall be included in the factor only to the extent the property is used in the regular course of taxpayer’s trade or business. The method of determining that portion of the value to be included in the factor will depend upon the facts of each case. The property factor shall include the average value of property includable in the factor (see sections (31)–(33) of this rule). (21) Property Factor—Property Used for the Production of Business Income. Property shall be included in the property factor if it is actually used or is available for or capable of being used during the tax period in the regular course of the trade or business of the taxpayer. Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor. For example, a plant temporarily idle or raw material reserves not currently being processed are includable in the factor. Property or equipment under construction during the tax period (except inventory type goods in process) shall be excluded from the factor until that property is actually used in the regular course of the trade or business of the taxpayer. If the property is partially used in the regular course of the trade or business of the taxpayer while under construction, the value of the property to the extent used shall be included in the property factor. Property used in the regular course of the trade or business of the taxpayer shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its conversion to the production of nonbusiness income, its sale or the lapse of an extended period of time (normally five (5) years) during which the property is held for sale. (A) Example: Taxpayer closed its manufacturing plant in State X and held the property for sale. The property remained vacant until its sale one (1) year later. The value of the manufacturing plant is included in the property factor until the plant is sold. (B) Example: Same as subsection (21)(A) of this rule except that the property was rented until the plant was sold. The plant is included in the property factor until the plant is sold. (C) Example: Taxpayer closed its manufacturing plant and leased the building under a five (5)-year lease. The plant is included in the property factor until the commencement of the lease. (D) Example: The taxpayer operates a chain of retail grocery stores. Taxpayer closed Store A, which was then remodeled into three (3) small retail stores such as a dress shop, dry cleaning and barber shop, which were leased to unrelated parties. The property is removed from the property factor on the date the remodeling of Store A commenced. (22) Property Factor—Consistency in Reporting. In filing returns with this state, if the taxpayer departs from or modifies the manner of valuing property, or of excluding or including property in the property factor used in returns for prior years in the return for the current year, the taxpayer shall disclose the nature and extent of the modification. If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under section 32.200 (Article IV), RSMo of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the valuation of property and in the exclusion or inclusion of property in the property factor, in its return to this state, the taxpayer shall disclose the nature and extent of the variance. (23) Property Factor—Numerator. The numerator of the property factor shall include the average value of the real and tangible personal property owned or rented by the taxpayer and used in this state during the tax period in the regular course of the trade or business of the taxpayer. Property in transit between locations of the taxpayer to whom it belongs shall be considered to be at the destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a taxpayer in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination. The value of mobile or movable property, such as construction equipment, trucks or leased electronic equipment, which are located within and without this state during the tax period shall be determined for purposes of the numerator of the factor on the basis of total time within the state during the tax period. An automobile assigned to a traveling employee shall be included in the numerator of the factor or the state to which the employee’s compensation is assigned under that payroll factor or in the numerator of the state in which the automobile is licensed. (24) Property Factor—Valuation of Owned Property. Property owned by the taxpayer shall be valued at its original cost. As a general rule, original cost is deemed to be the basis of the property for federal income tax purposes (prior to any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements and partial disposition, by reason of sale, exchange, abandonment, and the like. (A) Example: The taxpayer acquired a factory building in this state at a cost of five hundred thousand dollars ($500,000) and eighteen (18) months later expended one hundred thousand dollars ($100,000) for major remodeling of the building. Taxpayer filed its return for the current taxable year on the calendar-year basis. Depreciation deduction in the amount of twenty-two thousand dollars ($22,000) was claimed on the building for its return for the current taxable year. The value of the building includable in the numerator and denominator of the property factor is six hundred thousand dollars ($600,000) as the depreciation deduction is not taken into account in determining the value of the building for purposes of the factor. (B) Example: During the current taxable year, X Corporation merges into Y Corp­oration in a tax-free reorganization under the Internal Revenue Code (IRC). At the time of the merger, X Corporation owns a factory which X built five (5) years earlier at a cost of one (1) million dollars. X has been depreciating the factory at the rate of two percent (2%) per year, and its basis in X’s hands at the time of the merger is nine hundred thousand dollars ($900,000). Since the property is acquired by Y in a transaction in which, under the IRC, its basis in Y’s hands is the same as its basis in X’s, Y includes the property in Y’s property factor at X’s original cost, without adjustment for depreciation, (6/30/24) John R. Ashcroft DIVISION 10—DIRECTOR OF REVENUE 12 CSR 10-2—DEPARTMENT OF REVENUE that is one (1) million dollars. (C) Example: Corporation Y acquires the assets of Corporation X in a liquidation by which Y is entitled to use its stock cost as the basis of the X assets under Section 334(b)(2) of the 1954 IRC (that is, stock possessing eighty percent (80%) control is purchased and liquidated within two (2) years). Under these circumstances, Y’s cost of the assets is the purchase price of the X stock prorated over the X assets. (D) If original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of the acquisition by the taxpayer. (E) Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes. (F) Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes. (25) Property Factor—Valuation of Rented Property. Property rented by the taxpayer is valued at eight (8) times its net annual rental rate. The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for the property, less the aggregate annual subrental rates paid by subtenants of the taxpayer (see sections (61) and (62) of this rule for special rules where the use of the net annual rental rate produces a negative or clearly inaccurate value or where property is used by the taxpayer at no charge or rented at a nominal rental rate). (26) Subrentals. Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing that income. Accordingly there is no reduction in its value. (A) Example: The taxpayer receives subrents from a baker’s concession in a food market operated by the taxpayer. Since the subrents are business income, they are not deducted from rent paid by the taxpayer for the food market. (B) Example: The taxpayer rents a five (5)-story office building primarily for use in its multistate business, uses three (3) floors for its offices and subleases two (2) floors to various other businesses and persons such as professional people, shops and the like. The rental of the two (2) floors is incidental to the operation of the taxpayer’s trade or business. Since the subrents are business income, they are not deducted from the rent paid by the taxpayer. (C) Example: The taxpayer rents a twenty (20)-story office building and uses the lower two (2) stories for its general corporation headquarters. The remaining eighteen (18) floors are subleased to others. The rental of the eighteen (18) floors is not incidental to but rather is separate from the operation of the taxpayer’s trade or business. Since the subrents are nonbusiness income, they are to be deducted from the rent paid by the taxpayer. (27) Annual rental rate is the amount paid as rental for property for a twelve (12)-month period (that is, the amount of the annual rent). Where property is rented for less than a twelve (12)-month period, the rent paid for the actual period of rental shall constitute the annual rental rate for the tax period. However, where a taxpayer has rented property for a term of twelve (12) or more months and the current tax period covers a period of less than twelve (12) months (due, for example, to a reorganization or change of accounting period), the rent paid for the short tax period shall be annualized. If the rental term is for less than twelve (12) months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month-to-month basis. (A) Example: Taxpayer A which ordinarily files its returns based on a calendar year is merged into taxpayer B on April 30. The net rent paid under a lease with five (5) years remaining is two thousand five hundred dollars ($2,500) a month. The rent for the tax period January 1 to April 30 is ten thousand dollars ($10,000). After the rent is annualized, the net rent is thirty thousand dollars ($30,000) ($2,500 × 12). (B) Example: Same facts as in subsection (27)(A) of this rule except that the lease would have terminated on August 31. In this case, the annualized net rent is twenty thousand dollars ($20,000) ($2,500 × 8). (28) Annual rent is the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes: (A) Any amount payable for the use of real or tangible personal property, or any part of that property, whether designated as a fixed sum or money, or as a percentage of sales, profits or otherwise. Example: A taxpayer, pursuant to the terms of a lease, pays a lessor one thousand dollars ($1,000) per month as a base rental and at the end of the year pays the lessor one percent (1%) of its gross sales of four hundred thousand dollars ($400,000). The annual rent is sixteen thousand dollars ($16,000) – (($12,000) plus one percent (1%) of four hundred thousand dollars ($400,000) or four thousand dollars ($4,000)); and (B) Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are require to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities, janitor services, and the like. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items. 1. Example: A taxpayer, under the terms of a lease, pays the lessor twelve thousand dollars ($12,000) a year rent plus taxes in the amount of two thousand dollars ($2,000) and interest on a mortgage in the amount of one thousand dollars ($1,000). The annual rent is fifteen thousand dollars ($15,000). 2. Example: A taxpayer stores part of its inventory in a public warehouse. The total charge for the year was one thousand dollars ($1,000) of which seven hundred dollars ($700) was for the use of storage space and three hundred dollars ($300) for inventory insurance, handling and shipping charges, and cash on delivery collections. The annual rent is seven hundred dollars ($700). (29) Annual rent does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles and the like. (30) Leasehold improvements, for the purposes of the property factor, shall be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor. (31) Property Factor—Averaging Property Values. As a general rule, the average value of property owned by the taxpayer shall be determined by averaging the values at the beginning and John R. Ashcroft (6/30/24) 12 CSR 10-2—DEPARTMENT OF REVENUE DIVISION 10—DIRECTOR OF REVENUE ending of the tax period. However, the director of revenue may require or allow averaging by monthly values if that method of averaging is required to properly reflect the average value of the taxpayer’s property for the tax period. (32) Averaging by monthly values will generally be applied if substantial fluctuations in the values of the property exist during the tax period or where property is acquired after the beginning of the tax period or disposed of before the end of the tax period. Example: The monthly value of the taxpayer’s property was as follows: January $ 2,000 February $ 2,000 March $ 3,000 April $ 3,500 May $ 4,500 June $ 10,000 July $ 15,000 August $ 17,000 September $ 23,000 October $ 25,000 November $ 13,000 December $ 200 Total $120,000 The average value of the taxpayer’s property includable in the property factor for the income year is determined as follows: $120,000 =$10,000 (33) Averaging with respect to rented property is achieved automatically by the method of determining the net annual rental rate of that property as set forth in sections (25)–(30) of this rule. (34) Payroll Factor—In General. The payroll factor of the apportionment formula for each trade or business of the taxpayer shall include the total amount paid by the taxpayer in the regular course of its trade or business for compensation during the tax period. (35) The total amount paid to employees is determined upon the basis of the taxpayer’s accounting method. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. Notwithstanding the taxpayer’s method of accounting, at the election of the taxpayer, compensation paid to employees may be included in the payroll factor by use of the cash method if the taxpayer is required to report that compensation under the method for unemployment compensation purposes. The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the factor. (A) Example: The taxpayer uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of taxpayer’s trade or business. The wages paid to those employees are treated as a capital expenditure by the taxpayer. The amount of those wages is included in the payroll factor. (B) Example: The taxpayer owns various securities which it holds as an investment separate and apart from its trade or business. The management of the taxpayer’s investment portfolio is the only duty of Mr. X, an employee. The salary paid for Mr. X is excluded from the payroll factor. (36) The term compensation means wages, salaries, commissions and any other form of remuneration paid to employees for personal services. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging and other benefits or services furnished to employees by the taxpayer in return for personal services; provided, that those amounts constitute income to the recipient under the federal IRC. In the case of employees not subject to the federal IRC (for example, those employed in foreign countries), the determination of whether the benefits or services would constitute income to the employees shall be made as though those employees are subject to the federal IRC. (37) The term employee means any officer of a corporation, or any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally a person will be considered to be an employee if s/he is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act (FICA); except that, since certain individuals are included within the term, employees in FICA who would not be employees under the usual common- law rules, it may be established that a person who is included as an employee for purposes of FICA is not an employee for purposes of this rule. (38) Return Consistency. In filing returns with this state, if the taxpayer departs from or modifies the treatment of compensation paid used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under section 32.200 (Article IV), RSMo of this the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the treatment of compensation paid, the taxpayer shall disclose in its return to this state the nature and extent of the variance. (39) Payroll Factor—Denominator. The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is immune from taxation, for example, by P.L. 86-272, is included in the denominator of the payroll factor. Example: A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is immune from taxation by P.L. 86-272. As to these latter employees, the compensation will be assigned to State C where their services are performed (that is, included in the denominator—but not the numerator—of the payroll factor) even though the taxpayer is not taxable in State C. (40) Payroll Factor—Numerator. The numerator of the payroll factor is the total amount paid in this state during the tax period by the taxpayer for compensation. The tests in section 32.200 (Article IV.14.), RSMo to be applied in determining whether compensation is paid in this state are derived from the Model Unemployment Compensation Act. Accordingly, if compensation paid to employees is included in the payroll factor by use of the cash method of accounting or if the taxpayer is required to report the compensation under that (6/30/24) John R. Ashcroft DIVISION 10—DIRECTOR OF REVENUE 12 CSR 10-2—DEPARTMENT OF REVENUE method for unemployment compensation purposes, it shall be presumed that the total wages reported by the taxpayer to this state for unemployment compensation purposes constitute compensation paid in this state except for compensation excluded under sections (34)–(41) of this rule. The presumption may be overcome by satisfactory evidence that an employee’s compensation is not properly reportable to this state for unemployment compensation purposes. (41) Payroll Factor—Compensation Paid in This State. Compensation is paid in this state if any one (1) of the following tests, applied consecutively, are met: (A) The employee’s service is performed entirely within the state; (B) The employee’s service is performed both within and without the state, but the service performed without the state is incidental to the employee’s service within the state. The word incidental means any service which is temporary or transitory in nature or which is rendered in connection with an isolated transaction; and (C) If the employee’s services are performed both within and without this state, the employee’s compensation will be attributed to this state if— 1. The employee’s base of operations is in this state. The term base of operations is the place of more or less permanent nature from which the employee starts his/her work and to which s/he customarily returns in order to receive instructions from the taxpayer or communications from his/her customers or other persons or to replenish stock or other materials, repair equipment or perform any other functions necessary to the exercise of his/her trade or profession at some other point(s); 2. There is no base of operations in any state in which some part of the service is performed, but the place from which the service is directed or controlled is in this state; or 3. The base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the employee’s residence is in this state. The term place from which the service is directed or controlled refers to the place from which the power to direct or control is exercised by the taxpayer. (42) Sales Factor—In General. Section 32.200 (Article IV.1(7)), RSMo defines the term sales to mean all gross receipts of the taxpayer not allocated under section 32.200 (Article IV.5.–8.), RSMo. Thus, for the purposes of the sales factor of the apportionment formula for each trade or business of the taxpayer, the term sales means all gross receipts derived by the taxpayer from transactions and activity in the regular course of that trade or business. The following are rules for determining sales in various situations: (A) In the case of a taxpayer engaged in manufacturing and selling or purchasing and reselling goods or products, sales includes all gross receipts from the sales of those goods or products (or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the tax period) held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business. Gross receipts for this purpose means gross sales less returns and allowances, and includes all interest income, service charges, carrying charges or time-price differential charges incidental to those sales. Federal and state excise taxes (including sales taxes) shall be included as part of the receipts if those taxes are passed on to the buyer or included as part of the selling price of the product; (B) In the case of cost plus fixed fee contracts, such as the operation of a government-owned plant for a fee, sales include the entire reimbursed cost, plus the fee; (C) In the case of a taxpayer engaged in providing services, such as the operation of an advertising agency, or the performance of equipment service contracts, research and development contracts, sales include the gross receipts from the performance of those services including fees, commission and similar items; (D) In the case of a taxpayer engaged in renting real or tangible property, sales include the gross receipts from the rental, lease or licensing the use of the property; (E) In the case of a taxpayer engaged in the sale, assignment or licensing of intangible personal property, such as patents and copyrights, sales include the gross receipts from them; and (F) If a taxpayer derives receipts from the sale of equipment use in its business, these receipts constitute sales. For example, a truck express company owns a fleet of trucks and sells its trucks under a regular replacement program. The gross receipts from the sales of the trucks are included in the sales factor. (43) Exceptions. In some cases certain gross receipts should be disregarded in determining the sales factor in order that the apportionment formula will operate fairly to apportion to this state the income of the taxpayer’s trade or business. (44) Return Consistency. In filing returns with this state, if the taxpayer departs from or modifies the basis for excluding or including gross receipts in the sales factor used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification. If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under section 32.200 (Article IV), RSMo of this Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the inclusion of exclusion of gross receipts, the taxpayer shall disclose in its return to this state the nature and extent of the variance. (45) Sales Factor—Denominator. The denominator of the sales factor shall include the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business except receipts excluded under section (64) of this rule. (46) Sale Factor—Numerator. The numerator of the sales factor shall include gross receipts attributable to this state and derived by the taxpayer from transactions and activity in the regular course of its trade of business. All interest income, service, charges, carrying charges or time-price differential charges incidental to the gross receipts shall be included regardless of the place where the accounting records are maintained or the location of the contract or other evidence of indebtedness. (47) Sales of Tangible Personal Property in This State. Gross receipts from sales of tangible personal property (except sales to the United States government; see section (54) of this rule) are in this state if the property is— (A) Delivered or shipped to a purchaser within this state regardless of the free on board (f.o.b.) point or other conditions of sale; or (B) Shipped from an office, store, warehouse, factory or other place of storage in this state and the taxpayer is not taxable in the state of the purchaser. John R. Ashcroft (6/30/24) 12 CSR 10-2—DEPARTMENT OF REVENUE DIVISION 10—DIRECTOR OF REVENUE (48) Property shall be deemed to be delivered or shipped to a purchaser within this state if the recipient is located in this state, even though the property is ordered from outside this state. Example: The taxpayer, with inventory in State A, sold one hundred thousand dollars ($100,000) of its products to a purchaser having branch stores in several states including this state. The order for the purchase was placed by the purchaser’s central purchasing department located in State B. Twenty- five thousand dollars ($25,000) of the purchaser’s order was shipped directly to purchaser’s branch store in this state. The branch store in this state is the purchaser within this state with respect to twenty-five thousand dollars ($25,000) of the taxpayer’s sales. (49) Property is delivered or shipped to a purchaser within this state if the shipment terminates in this state, even though the property is subsequently transferred by the purchaser to another state. Example: The taxpayer makes a sale to a purchaser who maintains a central warehouse in this state at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in another state for sale. All of taxpayer’s products shipped to the purchaser’s warehouse in this state is property delivered or shipped to a purchaser within this state. (50) The term purchaser within this state shall include the ultimate recipient of the property if the taxpayer in this state, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this state. Example: A taxpayer in this state sold merchandise to a purchaser in State A. Taxpayer directed the manufacturer or supplier of the merchandise in State B to ship the merchandise to the purchaser’s customer in this state pursuant to purchaser’s instructions. The sale by the taxpayer is in this state. (51) When property being shipped by a seller from the state of origin to a consignee in another state is diverted while enroute to a purchaser in this state, the sales are in this state. Example: The taxpayer, a produce grower in State A, begins shipment of perishable produce to the purchaser’s place of business in State B. While enroute, the produce is diverted to the purchaser’s place of business in this state in which state the taxpayer is subject to tax. The sale by the taxpayer is attributed to this state. (52) If the taxpayer is not taxable in the state of the purchaser, the sale is attributed to this state if the property is shipped from an office, store, warehouse, factory or other place of storage in this state. Example: The taxpayer has its head office and factory in State A. It maintains a branch office and inventory in this state. Taxpayer’s only activity in State B is the solicitation of orders by a resident salesman. All orders by the State B salesman are sent to the branch office in this state for approval and are filled by shipment from the inventory in this state. Since taxpayer is immune under P.L. 86-272 from tax in State B, all sales of merchandise to purchasers in State B are attributed to this state, the state from which the merchandise was shipped. (53) If a taxpayer whose salesman operates from an office located in this state makes a sale to a purchaser in another state in which the taxpayer is not taxable and the property is shipped directly by a third party to the purchaser, the following rules apply: if the taxpayer is taxable in the state from which the third party ships the property, then the sale is in that state; and if the taxpayer is not taxable in the state from which the property is shipped, then the sale is in this state. Example: The taxpayer in this state sold merchandise to a purchaser in State A. Taxpayer is not taxable in State A. Upon direction of the taxpayer, the merchandise was shipped directly to the purchaser by the manufacturer in State B. If the taxpayer is taxable in State B, the sale is in State B. If the taxpayer is not taxable in State B, the sale is in this state. (54) Sales Factor—Sales of Tangible Personal Property to United States Government in This State. Gross receipts from sales of tangible personal property to the United States government are in this state if the property is shipped from an office, store, warehouse, factory or other place of storage in this state. For purposes of this rule, only sales for which the United States government makes direct payment to the seller under the terms of a contract constitute sales to the United States government. Thus, as a general rule, sales by a subcontractor to the prime contractor, the party to the contract with the United States government, do not constitute sales to the United States government. (A) Example: A taxpayer contracts with General Services Administration to deliver X number of trucks which were paid for by the United States government. The sale is a sale to the United States government. (B) Example: The taxpayer as a subcontractor to a prime contractor with the National Aeronautics and Space Administra- tion contracts to build a component of a rocket for one (1) million dollars. The sale by the subcontractor to the prime contractor is not a sale to the United States government. (55) Sales Factor—Sales Other Than Sales of Tangible Personal Property in This State. Section 32.200 (Article IV.17.), RSMo provides for the inclusion in the numerator of the sales factor of gross receipts from transactions other than sales of tangible personal property (including transactions with the United States government); under that section, gross receipts are attributed to this state if the income-producing activity which gave rise to the receipts is performed wholly within this state. Also, gross receipts are attributed to this state if, with respect to a particular item of income, the income-producing activity is performed within and without this state but the greater proportion of the income-producing activity is performed in this state, based on costs of performance. (56) Income-Producing Activity. The term income-producing activity applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gains or profit. This activity does not include transactions and activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, income-producing activity includes, but is not limited to, the following: (A) The rendering of personal services by employees or the utilization of tangible and intangible property by the taxpayer in performing a service; (B) The sale, rental, leasing, licensing or other use of real property; (C) The rental, leasing, licensing or other use of tangible personal property; and (D) The sale, licensing or other use of intangible personal property. (57) The mere holding of intangible personal property is not, of (6/30/24) John R. Ashcroft DIVISION 10—DIRECTOR OF REVENUE 12 CSR 10-2—DEPARTMENT OF REVENUE itself, an income-producing activity. (58) Costs of Performance. The term costs of performance means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer. (59) Receipts (other than from sales of tangible personal property), in respect to a particular income-producing activity, are in this state if the income-producing activity is performed— (A) Wholly within this state; or (B) Both inside 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 costs of performance. (60) Special Rules. The following are special rules for determining when receipts from the income-producing activities described in the following are in this state: (A) Gross receipts from the sale, lease, rental or licensing of real property are in this state if the real property is located in this state; (B) Gross receipts from the rental, lease or licensing of tangible personal property are in this state if the property is located in this state. The rental, lease, licensing or other use of tangible personal property in this state is a separate income-producing activity from the rental, lease, licensing or other use of the same property while located in another state; consequently, if property is within and without this state during the rental, lease or licensing period, gross receipts attributable to this state shall be measured by the ratio which the time the property was physically present or was used in this state bears to the total time or use of the property everywhere during that period. Example: Taxpayer is the owner of ten (10) railroad cars. During the year, the total of the days each railroad car was present in this state was fifty (50) days. The receipts attributable to the use of each of the railroad cars in this state are a separate item of income and shall be determined as follows: (10 X 50) = 500 X Total Receipts 3650 = Receipts Attributable to this State; and (C) Gross receipts for the performance of personal services are attributable to this state to the extent those services are performed in this state. If services relating to a single item of income are performed partly within and partly without this state, the gross receipts for the performance of those services shall be attributable to this state only if a greater proportion of the services was performed in the state, based on costs of performance. Usually, where services are performed partly within and partly without this state, the services performed in each state will constitute a separate income-producing activity; in that case, the gross receipts for the performance of services attributable to this state shall be measured by the ratio which the time spent in performing the services in this state bears to the total time spent in performing the services everywhere. Time spent in performing services includes the amount of time expended in the performance of a contract or other obligation which gives rise to the gross receipts. Personal service not directly connected with the performance of the contract, or other obligation, as for example, time expended in negotiating the contract, is excluded from the computations. 1. Example: Taxpayer, a road show, gave theatrical performances at various locations in State X and in this state during the tax period. All gross receipts from performances given in this state are attributed to this state. 2. Example: Taxpayer, a public opinion survey corporation, conducted a poll by its employees in State X and in this state for the sum of nine thousand dollars ($9,000). The project required six hundred (600) man-hours to obtain the basic data and prepare the survey report. Two hundred (200) of the six hundred (600) man-hours were expended in this state. The receipt attributable to this state is: $3,000 ( 200 × $9,000 = $3,000) (61) Section 32.200 (Article IV.18.), RSMo provides that, if the allocation and apportionment provisions of section 32.200 (Article IV), RSMo do not fairly represent the extent of the taxpayer’s business activity in this state, the taxpayer may petition for or the director of revenue may require, in respect to any part of the taxpayer’s business activity, if reasonable— (A) Separate accounting; (B) The exclusion of any one (1) or more of the additional factors; (C) The inclusion of one (1) or more additional factors which will fairly represent the taxpayer’s business activity in this state; or (D) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income. (62) Section 32.200 (Article IV.18.), RSMo permits a department from the allocation and apportionment provisions of section 32.200 (Article IV), RSMo only in limited and specific cases. Section 32.200 (Article IV.18.), RSMo may be invoked only in specific cases where unusual fact situations (which ordinarily will be unique and nonrecurring) produce incongruous results under the apportionment and allocation provisions contained in section 32.200 (Article IV), RSMo. In the case of certain industries such as air transportation, rail transportation, ship transportation, trucking, television, radio, motion pictures, various types of professional athletics etc., the sections of this rule in respect to the apportionment formula do not set forth appropriate procedures for determining the apportionment factors. Nothing in section 32.200 (Article IV.18.), RSMo or in sections (61)–(64) of this rule shall preclude the director of revenue from establishing appropriate procedures under section 32.200 (Article IV.10.–17.), RSMo for determining the apportionment factors for these industries, but those procedures shall be applied uniformly. (63) Special Rules—Property Factor. The following special rules are established in respect to the property factor of the apportionment formula: (A) If the subrents taken into account in determining the net annual rental rate under sections (25)–(30) of this rule produce a negative or clearly inaccurate value for any item of property, another method which will properly reflect the value of rented property may be required by the director of revenue or requested by the taxpayer. In no case, however, shall that value be less than an amount which bears the same ratio to the annual rental rate paid by the taxpayer for the property as the fair market value of that portion of the property used by the taxpayer bears to the total fair market value of the rented property. Example: The taxpayer rents a ten (10)-story building at an annual rental rate of one (1) million dollars. John R. Ashcroft (6/30/24) 12 CSR 10-2—DEPARTMENT OF REVENUE DIVISION 10—DIRECTOR OF REVENUE Taxpayer occupies two (2) stories and sublets eight (8) stories for one (1) million dollars a year. The net annual rental rate of the taxpayer must not be less than two-tenths (2/10) of the taxpayer’s annual rental rate for the entire year or two hundred thousand ($200,000); and (B) If property owned by others is used by the taxpayer at no charge or rented by the taxpayer for a nominal rate, the net annual rental rate for that property shall be determined on the basis of a reasonable market rental rate for the property. (64) Special Rules—Sales Factor. The following special rules are established in respect to the sales factor of the apportionment formula: (A) Where substantial amounts of gross receipts arise from an incidental or occasional sale of a fixed asset used in the regular course of the taxpayer’s trade or business, those gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale of a factory or plant will be excluded; (B) Insubstantial amounts of gross receipts arising from incidental or occasional transactions or activities may be excluded from the sales factor unless the exclusion would materially affect the amount of income apportioned to this state. For example, the taxpayer ordinarily may include or exclude from the sales factor gross receipts from transactions such as the sale of office furniture, business automobiles, and the like; and (C) Where the income-producing activity in respect to business income from intangible personal property can be readily identified, that income included in the denominator of the sales factor and, if the income-producing activity occurs in this state, in the numerator of the sales factor as well. For example, usually the income-producing activity can be readily identified in respect to interest income received on deterred payments on sales of tangible property (subsection (42)(A) of this rule) and income from the sale, licensing or other use of intangible personal property (subsection (56)(D) of this rule). Where business income from intangible property cannot readily be attributed to any particular income-producing activity of the taxpayer, that income cannot be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor. For example, where business income in the form of dividends received on stock, royalties received on patents or copyrights, or interest received on bonds, debentures or government securities results from the mere holding of the intangible personal property by the taxpayer, the dividends and interest shall be excluded from the denominator of the sales factor. (65) Single Trade or Business. The determination of whether the activities of the taxpayer constitute a single trade or business or more than one (1) trade or business will be established by the facts in each case. In general, the activities of the taxpayer will be considered a single business if there is evidence to indicate that the segments under consideration are integrated with, dependent upon or contribute to each other and the operations of the taxpayer as a whole. The following factors are considered to be good indicia of a single trade or business and the presence of any of these factors creates a strong presumption that the activities of the taxpayer constitute a single trade or business: (A) Same Type of Business. A taxpayer is generally engaged in a single trade or business when all of its activities are in the same general line. For example, a taxpayer which operates a chain of retail grocery stores will almost always be engaged in a single trade or business; (B) Steps in a Vertical Process. A taxpayer is almost always engaged in a single trade or business when its various divisions or segments are engaged in different steps in a large, vertically structured enterprise. For example, a taxpayer which explores for and mines copper ores; concentrates, smelts and refines the copper ores; and fabricates the refined copper into consumer products in engaged in a single trade or business, regardless of the fact that the various steps in the process are operated substantially independently of each other with only general supervision from the taxpayer’s executive offices; and (C) Strong Centralized Management. A taxpayer which might otherwise be considered as engaged in more than one (1) trade or business is properly considered as engaged in one (1) trade or business when there is a strong central management, coupled with the existence of centralized departments for functions, such as financing, advertising, research or purchasing. Thus, some conglomerates may properly be considered as engaged in only one (1) trade or business when the central executive officers are normally involved in the operations of the various divisions and there are centralized offices which perform for the divisions the normal matters which a truly independent business would perform for itself, such as accounting, personnel, insurance, legal, purchasing, advertising or financing. (66) Combined Reports Prohibited. Returns which combine and apportion the taxable income of more than one (1) corporation are prohibited, except to the extent that they satisfy the requirements of section 143.431.3., RSMo. AUTHORITY: section 143.961, RSMo 1986.* Regulation 1.32.200-IV was first filed Dec. 30, 1975, effective Jan. 9, 1976. Amended: Filed Feb. 24, 1984, effective June 11, 1984. Amended: Filed July 2, 1985, effective Oct. 11, 1985. Amended: Filed Oct. 8, 1986, effective Jan. 30, 1987. *Original authority: 143.961, RSMo 1972. In re Kansas City Star Co., 142 SW2d 1029 (1940). Trial court did not err by rejection offered finding that state auditor had promulgated a rule during the years 1934, 1935 and 1936 declaring the total net income of manufacturing and business companies subject to income tax unless they had a branch house or capital investment outside the state. This rule had been promulgated under former Missouri St. Ann, section 10115, but subsequently overturned by Supreme Court.