Sales Factor

(1) In General. (a) T.C.A. § 67-4-2004 defines the term “sales” to mean all gross receipts of the taxpayer not allocated under § 67-4-2011. Thus, for the purposes of the sales factor of the apportionment formula, the term “sales” means all gross receipts derived by the taxpayer from transactions and activity producing business earnings. The following are rules for determining “sales” in various situations: 1. 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 such 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. 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 such sales. Federal and state excise taxes (including sales FRANCHISE AND EXCISE TAX RULES AND REGULATIONS CHAPTER 1320-06-01 taxes) shall be included as part of such receipts if such taxes are passed on to the buyer or included as part of the selling price of the product. 2. 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. 3. In the case of a taxpayer engaged in providing services, such as the operation of an advertising agency, or the performance of equipment service contract, research and development contracts, “sales” includes the gross receipts from the performance of such services including fees, commissions, and similar items. 4. In the case of a taxpayer engaged in renting real or tangible property, “sales” includes the gross receipts from the rental, lease, or licensing the use of the property. 5. In the case of a taxpayer engaged in the sale, assignment, or licensing of intangible personal property such as patents and copyrights, “sales” includes the gross receipts therefrom. 6. If a taxpayer derives receipts from the sale of equipment used in its business, such 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. (b) 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 business earnings of the taxpayer’s trade or business. For example, where substantial amounts of gross receipts arise from the sale of fixed assets used in the trade or business, such as the sale of a factory or plant, gross receipts will be excluded from the sales factor. In order to give proper recognition to the apportionment of business earnings (loss) in such instances, the net gain arising from the transaction or activity will be included in the sales factor. (2) Zero Denominator. In the use of any apportionment formula, where the denominator of a factor is zero, such factor must be eliminated entirely and the average then computed from the remaining factor or factors.