KRS 141.120 — Division of income of interstate business for tax purposes -- Apportionment

This section applies to taxable years beginning on or after January 1, 2018.
(1) As used in this section:
(a) "Apportionable income" means:
1. All income that is appor tionable under the Constitution of the United
States and is not allocated under this section, including:
a. Income arising from transactions and activity in the regular course
of the taxpayer's trade or business; and
b. Income arising from tangible and int angible property if the
acquisition, management, employment, development, or
disposition of the property is or was related to the operation of the
taxpayer's trade or business; and
2. Any income that would be allocable to this state under the Constitution
of the United States, but that is apportioned rather than allocated
pursuant to this section;
(b) "Commercial domicile" means the principal place from which the trade or
business of the taxpayer is directed or managed;
(c) "Financial organization" means an y bank, trust company, savings bank,
industrial bank, land bank, safe deposit company, private banker, savings and
loan association, cooperative bank, small loan company, sales finance
company, investment company, or any similar type of entity;
(d) "Non-apportionable income" means all income other than apportionable
income;
(e) "Receipts" means all gross receipts of the taxpayer that are not allocated under
this section, and that are received from transactions and activity in the regular
course of the taxpa yer's trade or business, except that receipts of a taxpayer
from:
1. Hedging transactions; and
2. The maturity, redemption, sale, exchange, loan, or other disposition of
cash or securities;
shall be excluded; and
(f) "This state" means the Commonwealth of Kentucky.
(2) Any taxpayer having income from business activity which is taxable both within
and without this state, other than activity as a provider as defined in KRS 136.602, a
financial organization, or a public s ervice company, shall allocate and apportion net
income as provided in this section.
(3) For purposes of allocation and apportionment of income under this section, a
taxpayer is taxable in another state if:
(a) In that state the taxpayer is subject to a ne t 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) That state has jurisdiction to subject the taxpayer to a net income tax
regardless of whether, in fact, the state does or does not do so.
(4) Rents and royalties from real or tangible personal property, capital gains, interest, or
patent or copyright royalties, to the extent that they constitute nonapportionable
income, shall be allocated as provided in subsections (5) to (8) of this section.
(5) (a) Net rents and royalties from real property located in this state are allocable to
this state.
(b) Net rents and royalties from tangible personal property are allocable to this
state:
1. If and to the extent that the property is utilized in this state; or
2. In their entirety if the taxpayer's commercial domicile is in this state and
the taxpayer is not organized under the laws of or taxable in the state in
which the property is utilized.
(c) The extent of utilization of tangi ble personal property in a state is determined
by multiplying the rents and royalties by a fraction the numerator of which is
the number of days of physical location of the property in this state during the
rental or royalty period in the taxable year and the denominator of which is the
number of days of physical location of the property everywhere during all
rental or royalty periods in the taxable year. If the physical location of the
property during all rental or royalty periods is unknown or unascertain able by
the taxpayer, tangible personal property is utilized in the state in which the
property was located at the time the rental or royalty payer obtained
possession.
(6) (a) Capital gains and losses from sales of real property located in this state are
allocable to this state.
(b) Capital gains and losses from sales of tangible personal property are allocable
to this state if:
1. The property had a situs in this state at the time of the sale; or
2. The taxpayer's commercial domicile is in this state and the taxpayer is
not taxable in the state in which the property had a situs.
(c) Capital gains and losses from sales of intangible personal property are
allocable to this state if the taxpayer's commercial domicile is in this state.
(7) Interest is allocabl e to this state if the taxpayer's commercial domicile is in this
state.
(8) (a) Patent and copyright royalties are allocable to this state:
1. If and to the extent that the patent or copyright is utilized by the payer in
this state; or
2. If and to the extent that the patent or copyright is utilized by the payer in
a state in which the taxpayer is not taxable and the taxpayer's
commercial domicile is in this state.
(b) A patent is utilized in a state to the extent that it is employed in production,
fabrication, manufacturing, or other processing in the state or to the extent that
a patented product is produced in the state. If the basis of receipts from patent
royalties does not permit allocation to states or if the accounting procedures
do not reflect state s of utilization, the patent is utilized in the state in which
the taxpayer's commercial domicile is located.
(9) All apportionable income shall be apportioned to this state by multiplying the
income by a fraction the numerator of which is the total receip ts of the taxpayer in
this state during the taxable year and the denominator of which is the total receipts
of the taxpayer everywhere during the taxable year.
(10) Receipts from the sale of tangible personal property are in this state if:
(a) The property is delivered or shipped to a purchaser, other than the United
States government, within this state regardless of the f.o.b. point or other
conditions of the sale; or
(b) The property is shipped from an office, store, warehouse, factory, or oth er
place of storage in this state and the purchaser is the United States
government.
(11) (a) Receipts, other than receipts described in subsection (10) of this section, are in
this state if the taxpayer's market for the sales is in this state. The taxpaye r's
market for sales is in this state:
1. In the case of sale, rental, lease, or license of real property, if and to the
extent the property is located in this state;
2. In the case of rental, lease, or license of tangible personal property, if
and to the extent the property is located in this state;
3. In the case of sale of a service, if and to the extent the service is
delivered to a location in this state; and
4. In the case of intangible property:
a. That is rented, leased, or licensed, if and to the e xtent the property
is used in this state, provided that intangible property utilized in
marketing a good or service to a consumer is used in this state if
that good or service is purchased by a consumer who is in this
state; and
b. That is sold, if and to the extent the property is used in this state,
provided that:
i. A contract right, government license, or similar intangible
property that authorizes the holder to conduct a business
activity in a specific geographic area is used in this state if
the geographic area includes all or part of this state;
ii. Receipts from intangible property sales that are contingent on
the productivity, use, or disposition of the intangible property
shall be treated as receipts from the rental, lease, or licensing
of the inta ngible property under subdivision a. of this
subparagraph; and
iii. All other receipts from a sale of intangible property shall be
excluded from the numerator and denominator of the receipts
factor.
(b) If the state or states of assignment under paragraph (a) of this subsection
cannot be determined, the state or states of assignment shall be reasonably
approximated.
(c) If the taxpayer is not taxable in a state to which a receipt is assigned under
paragraph (a) or (b) of this subsection, or if the state of assignment cannot be
determined under paragraph (a) of this subsection or reasonably approximated
under paragraph (b) of this subsection, the receipt shall be excluded from the
denominator of the receipts factor.
(d) The department may promulgate administr ative regulations necessary to carry
out the purposes of this section.
(12) (a) If the allocation and apportionment provisions of this section do not fairly
represent the extent of the taxpayer's business activity in this state, the
taxpayer may petition f or or the department may require, in respect to all or
any part of the taxpayer's business activity, if reasonable:
1. Separate accounting;
2. The inclusion of one (1) or more additional factors which will fairly
represent the taxpayer's business activity in this state; or
3. The employment of any other method to effectuate an equitable
allocation and apportionment of the taxpayer's income.
(b) 1. If the allocation and apportionment provisions of this section do not
fairly represent the extent of business a ctivity in this state of taxpayers
engaged in a particular industry or in a particular transaction or activity,
the department may, in addition to the authority provided in paragraph
(a) of this subsection, promulgate administrative regulations for
determining alternative allocation and apportionment methods for those
taxpayers.
2. An administrative regulation promulgated pursuant to this paragraph
shall be applied uniformly, except that with respect to any taxpayer to
whom the administrative regulation app lies, the taxpayer may petition
for or the department may require adjustment according to paragraph (a)
of this subsection.
(c) 1. The party petitioning for or the department requiring the use of any
method to effectuate an equitable allocation and apporti onment of the
taxpayer's income pursuant to paragraph (a) of the subsection shall prove
by clear and convincing evidence:
a. That the allocation and apportionment provisions of this section do
not fairly represent the extent of the taxpayer's business activity in
this state; and
b. That the alternative to the provisions is reasonable.
2. The same burden of proof shall apply whether the taxpayer is petitioning
for, or the department is requiring, the use of any reasonable method to
effectuate an equitable allocation and apportionment of the taxpayer's
income. Notwithstanding the previous sentence, if the department can
show that in any t wo (2) of the prior five (5) taxable years, the taxpayer
had used an allocation or apportionment method at variance with its
allocation or apportionment method or methods used for the other
taxable years, then the department shall not bear the burden of pr oof in
imposing a different method provided by paragraph (a) of this
subsection.
(d) If the department requires any method to effectuate an equitable allocation and
apportionment of the taxpayer's income, the department cannot impose any
civil or criminal penalty with reference to the tax due that is attributable to the
taxpayer's reasonable reliance solely on the allocation and apportionment
provisions of this subsection.
(e) A taxpayer that has received written permission from the department to use a
reasonable method to effectuate an equitable allocation and apportionment of
the taxpayer's income shall not have that permission revoked with respect to
transactions and activities that have already occurred unless there has been a
material change in, or a ma terial misrepresentation of, the facts provided by
the taxpayer upon which the department reasonably relied.