(1) Business income, in general, is apportioned to this state by a
three-factor formula consisting of property, payroll and sales regardless of
the method of accounting for long-term contracts elected by the taxpayer. The total of the property, payroll and sales
percentages is divided by three to determine the apportionment percentage. The apportionment percentage is then applied
to business income to determine the amount apportioned to this state.
(2) Under the percentage of completion method of accounting for long-term
contracts, the amount to be included each year as business income from each
contract is the amount by which the gross contract price that corresponds to
the percentage of the entire contract that has been completed during the income
years exceeds all expenditures made during the income year in connection with
the contract. In so doing, the account
must be made of the material and supplies on hand at the beginning and end of
the income year for use in each such contract.
(3) Under the completed contract method of accounting, business income
derived from long-term contracts is reported for the income year in which the
contract is finally completed and accepted.
Therefore, a special computation is required to compute the amount of
business income attributable to this state from each completed contract. Thus, all receipts and expenditures
applicable to such contracts, whether complete or incomplete as of the end of
the income year, are excluded from business income derived from other
sources. For example, short-term
contracts, interest, rents, royalties, etc., which are apportioned by the
regular three-factor formula of property, payroll and sales.
(4) In general the numerator and denominator of the property factor shall be
determined as set forth in ARM 42.26.231 through 42.26.237 and 42.26.262.
However, the following special rules are also applicable:
(a) The average value of the taxpayer's cost (including materials and labor) of construction in progress, to the extent such costs exceed progress billings
(accrued or received depending on whether the taxpayer is on the accrual or
cash accounting method) shall be included in the denominator of the property
factor. The value of any such
construction costs attributable to construction projects in this state shall be
included in the numerator of the property factor.
(b) Rent paid for the use of equipment directly attributable to a particular
construction project is included in the property factor at eight times the net
annual rental rate even though such rental expense may be capitalized into the
cost of construction.
(c) The property factor is computed in the same manner for all long-term
contract methods of accounting and is computed for each income year even though
under the completed contract method of accounting, business income is computed
separately.
(5) In general the numerator and denominator of the payroll factor shall be
determined as set forth in ARM 42.26.243 and 42.26.244. However, the following special criteria are
also applicable:
(a) Compensation paid to employees attributable to a particular construction
project is included in the payroll factor even though the costs may be
capitalized into the cost of construction.
(b) Compensation paid to employees who in the aggregate perform most of
their services in a state which their employer does not report them for
unemployment tax purposes, shall nonetheless be attributed to the state where
the services are actually performed.
(c) The payroll factor is computed in the same manner for all long-term
contract methods of accounting and is computed for each income year even though
under the completed contract method of accounting, business income is computed
separately.
(6) In general the numerator and denominator of the sales factor shall be
determined as set forth in ARM 42.26.253 and 42.26.254. However, the following special criteria are also
applicable:
(a) Gross receipts derived from the performance of a contract are
attributable to this state if the construction project is located in this
state. If the construction project is
located partly within and partly without this state, the gross receipts
attributable to this state are based upon the ratio of construction costs for
the project in this state incurred during the income year to the total
construction costs for the entire project during the income year or any other
method, such as engineering cost estimates, which will provide a reasonable
apportionment.
(b) If the percentage of completion method is used, the sales factor
includes only that portion of the gross contract price which corresponds to the
percentage of the entire contract which was completed during the income year.
(c) If the completed contract method of accounting is used, the sales factor
includes the portion of the gross receipts (progress billings) received or
accrued, whichever is applicable, during the income year attributable to each
contract.
(d) The sales factor, except as noted in (6) (b) and (c) , is computed in the
same manner, regardless of which long-term method of accounting the taxpayer
has elected, and is computed for each income year even though under the
completed contract method of accounting, business income is computed
separately.
(7) The total of the property, payroll and sales percentages is divided by
three to determine the apportionment percentage. The apportionment percentage is then applied to business income
to establish the amount apportioned to this state.