N.D. Admin. Code 81-03-09-20

Current through Supplement No. 394, October, 2024

Section 81-03-09-20 - Property factor - Valuation of rented property

1. Property rented by the taxpayer is valued at eight times its net annual rental rate. The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for such property, less the aggregate annual subrental rates paid by subtenants of the taxpayer. See sections 81-03-09-32, 81-03-09-33, and 81-03-09-34 for special sections where the use of such net annual rental rate produces a negative or clearly inaccurate value or where property is used by the taxpayer at no charge or rented at a nominal rental rate.

Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing such income. Accordingly there is no reduction in its value.

Example a: The taxpayer receives subrents from a bakery concession in a food market operated by the taxpayer. Since the subrents are business income they are not deducted from rent paid by the taxpayer for the food market.

Example b: The taxpayer rents a five-story office building primarily for use in its multistate business, uses three floors for its offices and subleases two floors to various other businesses and persons such as professional people, shops, and the like. The rental of the two floors is incidental to the operation of the taxpayer's trade or business. Since the subrents are business income they are not deducted from the rent paid by the taxpayer.

Example c: The taxpayer rents a twenty-story office building and uses the lower two stories for its general corporation headquarters. The remaining eighteen floors are subleased to others. The rental of the eighteen floors is not incidental to but rather is separate from the operation of the taxpayer's trade or business. Since the subrents are nonbusiness income they are to be deducted from the rent paid by the taxpayer.

2. "Annual rental rate" is the amount paid as rental for property for a twelve-month period, that is, the amount of the annual rent. Where property is rented for less than a twelve-month period, the rent paid for the actual period of rental shall constitute the "annual rental rate" for the tax period. However, where a taxpayer has rented property for a term of twelve or more months and the current tax period covers a period of less than twelve months, due, for example, to a reorganization or change of accounting period, the rent paid for the short tax period shall be annualized. If the rental term is for less than twelve months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month-to-month basis.

Example d: Taxpayer A which ordinarily files the taxpayer's return based on a calendar year is merged into taxpayer B on April thirtieth. The net rent paid under a lease with five years remaining is two thousand five hundred dollars a month. The rent for the tax period January first to April thirtieth is ten thousand dollars. After the rent is annualized, the net rent is thirty thousand dollars (two thousand five hundred dollars times twelve).

Example e: Same facts as in example a except that the lease would have terminated on August thirty-first. In this case, the annualized net rent is twenty thousand dollars (two thousand five hundred dollars times eight).

3. "Annual rent" is the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes:

a. Any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits, or otherwise.

Example: A taxpayer, pursuant to the terms of a lease, pays a lessor one thousand dollars per month as a base rental and at the end of the year pays the lessor one percent of its gross sales of four hundred thousand dollars. The annual rent is sixteen thousand dollars, twelve thousand dollars plus one percent of four hundred thousand dollars or four thousand dollars.

b. Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs, or any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities, janitor services, and so forth. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items.

Example 1: A taxpayer, pursuant to the terms of the lease, pays the lessor twelve thousand dollars a year rent plus taxes in the amount of two thousand dollars and interest on a mortgage in the amount of one thousand dollars. The annual rent is fifteen thousand dollars.

Example 2: A taxpayer stores part of the taxpayer's inventory in a public warehouse. The total charge for the year was one thousand dollars of which seven hundred dollars was for the use of storage space and three hundred dollars for inventory insurance, handling and shipping charges, and cash on delivery collections. The annual rent is seven hundred dollars.

"Annual rent" does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles, and so forth.

4. Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor.

General Authority: NDCC 57-38-56

Law Implemented: NDCC 57-38.1-11, 57-59-01 (art.IV(11))

N.D. Admin Code 81-03-09-20