ARM 42.26.807. AIRLINE REGULATION EXAMPLES

(1) Assume the following facts for an airline for the tax year: (a) It has ten 747s ready for flight and in revenue service at an average per unit cost of $40,000,000 for nine of the aircraft. It rents the remaining 747 from another airline for $9,000,000 per year. At eight times rents, the latter is valued at $72,000,000 for apportionment purposes. Total 747 valuation is, therefore, $432,000,000 for property factor denominator purposes. (b) It has 20 727s ready for flight and in revenue service at an average per unit cost of $20,000,000. Total 727 valuation is, therefore, $400,000,000 for property factor denominator purposes. (c) It has nonflight tangible property (n.t.p.) valued at original cost of $200,000,000. (d) It has the following annual payroll: Flight personnel $ 60,000,000 Nonflight personnel 40,000,000 Total $100,000,000 (e) From its operations, it has total receipts of $50,000,000, apportionable net income of $1,000,000 and no nonapportionable income. The total $50,000,000 is flight revenue; there is no nonflight revenue. (f) It has the following within state X: (i) 10 percent of its 747 flight departures (.10 x 432,000,000 = $43,200,000); (ii) 20 percent of its 727 flight departures (.20 x 400,000,000 = $80,000,000); (iii) 5 percent of its nonflight tangible property (n.t.p.) (.05 x 200,000,000 = $10,000,000); and (iv) 15 percent of its nonflight personnel payroll (.15 x 40,000,000 = $6,000,000). (g) State X has a corporate tax rate of 10 percent. The airline's tax liability to state X would be determined as follows: Property Factor: Numerator Denominator 43,200,000 (747s) 432,000,000 (747s) +80,000,000 (727s) + 400,000,000 (727s) + 10,000,000 (n.t.p.) + 200,000,000 (n.t.p.) 133,200,000 / 1,032,000,000 = 12.91% Receipts Factor: Numerator Denominator 43,200,000 (747s) 432,000,000 (747s) + 80,000,000 (727s) + 400,000,000 (727s) 123,200,000 / 832,000,000 = 14.8% departure ratio = 14.8% 7,403,846 (14.8% x 50,000,000) / 50,000,000 = 14.81% Payroll Factor: Numerator Denominator 6,000,000 (nonflight) 40,000,000 (nonflight) + 8,880,000 ( 14.8% x 60,000,000 flight) + 60,000,000 (flight) 14,880,000 + 100,000,000 = 14.88% Average Ratio Equals the sum of the property, receipts, and payroll factors divided by 3. (12.91% + 14.81% + 14.88%) /3 = 14.20% Taxable Income in state X: .1420 x 1,000,000 = $142,000 Tax Liability to state X: .10 x $142,000 = $14,200 (2) Same facts except (1)(f) is changed to read: (a) It has the following within state Y: (i) 6 percent of its 747 flight departures (.06 x 432,000,000 = $25,920,000); (ii) 31 percent of its 727 flight departures (.31 x 400,000,000 = $124,000,000); and (iii) 3 percent of its nonflight tangible property (n.t.p.) x (.03 x 20,000,000 = $6,000,000); and (iv) 7 percent of its nonflight personnel payroll (.07 x 40,000,000 = $2,800,000) (b) State Y has a corporate tax rate of 6.5 percent. The airline's tax liability to state Y would be determined as follows: Property Factor: Numerator Denominator 25,920,000 (747s) 432,000,000 (747s) +124,000,000 (727s) + 400,000,000 (727s) + 6,000,000 (n.t.p.) + 200,000,000 (n.t.p.) 155,920,000 / 1,032,000,000 = 15.1085% Receipts Factor: Numerator Denominator 25,920,000 (747s) 432,000,000 (747s) + 124,000,000 (727s) + 400,000,000 (727s) 149,920,000 / 832,000,000 = 18.0192% departure ratio = 18.0192% 9,009,600 (18.0192% x 50,000,000) / 50,000,000 = 18.0192 percent Payroll Factor: Numerator Denominator 2,800,000 (nonflight) 40,000,000 (nonflight) +10,811,520 (18.0192% x 60,000,000 flight) + 60,000,000 (flight) 13,611,520 / 100,000,000 = 13.6114% Average Ratio Equals the sum of the property, receipts, and payroll factors divided by 3. (15.1085% + 18.0192% + 13.6114%) / 3 = 15.5797% Taxable Income in state Y: .155797 x 1,000,000 = $155,797 Tax Liability to state Y: .065 x $155,797 = $10,127