ARM 42.26.807. AIRLINE REGULATION EXAMPLES

(1) Assume the following facts for an airline for the tax year: (a) It has 10 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 non-flight 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 Non-flight personnel 40,000,000 Total $100,000,000 (e) From its operations, it has total receipts of $50,000,000, business net income of $1,000,000 and no non-business income. The total $50,000,000 is flight revenue; there is no non-flight revenue. (f) It has the following within state X: (i) 10% of its 747 flight departures (.10 x 432,000,000 = $43,200,000) ; (ii) 20% of its 727 flight departures (.20 x 400,000,000 = $80,000,000) ; (iii) 5% of its non-flight tangible property (n.t.p.) (.05 x 200,000,000 = $10,000,000) ; and (iv) 15% of its non-flight personnel payroll (.15 x 40,000,000 = $6,000,000) . (g) State X has a corporate tax rate of 10%. 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% Sales 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 (non-flight) 40,000,000(non-flight) + 8,880,000 (14.8%x60,000,000 flight) + 60,000,000 (flight) 14,880,000 + 100,000,000 = 14.88% Average Ratio Equals the sum of the property, sales 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 = $14,200.00 (2) Same facts except (1) (f) is changed to read: (a) It has the following within state Y: (i) 6% of its 747 flight departures (.06 x 432,000,000 = $25,920,000) ; (ii) 31% of its 727 flight departures (iii) 3% of its non-flight tangible property (n.t.p.) x (.03 x 20,000,000 = $6,000,000) ; and (iv) % of its non-flight personnel payroll (.07 x 40,000,000 = $2,800,000) (b) State Y has a corporate tax rate of 6½%. 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% Sales 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% Payroll Factor: Numerator Denominator 2,800,000 (non-flight) 40,000,000(non-flight) + 10,811,520 (18.0192%x60,000,000 flight) + 60,000,000(flight) 13,611,520 / 100,000,000=13.6114% Average Ratio Equals the sum of the property, sales 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