W. Va. Code R. § 110-24-7

Current through Register Vol. XLI, No. 21, May 23, 2024

Section 110-24-7 - Allocation and Apportionment for tax years ending prior to January 1, 2022

7.1. Net rents and royalties from tangible personal property are allocable to this state in accordance with W. Va. Code § 11-24-7, if they are nonbusiness income.

7.2. The extent of use of tangible personal property in a state is determined by multiplying the nonbusiness rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is used in the state in which the property was located at the time the rental or royalty payer obtained possession.

7.2.a. If the property is in this State for any part of a day, that time shall be counted as a full day.

Examples.

7.2.b. Corporation A was formed in Ohio and has its main offices there. Corporation A owns an apartment complex in West Virginia and leases computers to users located in West Virginia. The nonbusiness net rental income from the rental of the apartment complex is allocated to West Virginia for purposes of the West Virginia Corporation Net Income Tax. Likewise, the nonbusiness net rental income received by Corporation A as a lessor of computers in this State is allocated to this State.

7.2.c. Corporation Z was formed in State X and has its commercial domicile in the State of West Virginia. Corporation Z leases tangible personal property to customers in State K and derives nonbusiness income from that activity. State K has no corporation net income tax. The net receipts from leasing tangible personal property in State K are allocated entirely to the State of West Virginia.

7.2.d. Corporation Alpha, organized and headquartered in California, leases coal mining equipment in West Virginia. Alpha began leasing equipment in West Virginia on April 1 and is a calendar year taxpayer. The coal mining equipment was not in this State until April 1, the date the lease commenced. The property is leased in this State for 275 of the 365 days in the year. If rental income from the coal mining equipment located in the State of West Virginia is nonbusiness income, and if Alpha Corporation netted $15,000 for leasing this equipment for the entire year, Alpha would include in West Virginia income the following amount: 275/365 x $15,000 = $11,301.37.

7.2.d.1. If Alpha Corporation has adequate records to show the net rental income from the equipment while the equipment was leased in this State, then it may use the actual net rental income and not "apportion" its allocation of net rental income.

7.3. Business activities partially within and partially without this State.

7.3.a. Where a corporation has income from business activities partially within this State and partially outside of this State, all net income, after deducting those items specifically allocated under W. Va. Code § 11-24-7(d), shall be apportioned to this State by multiplying the net income by a fraction, the numerator of which is the property factor plus the payroll factor plus two times the sales factor, and the denominator of which is four, reduced by the number of factors, if any, having no denominator except if the sales factor has a denominator of zero, the denominator of the apportionment fraction shall be reduced by two. Note that this subdivision does not apply if the corporation is subject to a special apportionment method under W. Va. Code § 11-24-7a or 7b or is authorized to use a special apportionment method pursuant to W. Va. Code § 11-24-7(h).

7.3.a.1. Under W. Va. Code § 11-24-7(c), if 100% of the business activities of a corporation take place in West Virginia, then the corporation does not apportion its income using the apportionment methodologies prescribed by the statute, and the entire net income of the corporation is subject to the corporation net income tax.

7.3.a.1.A. A combined group apportions the group's adjusted federal taxable income from unitary business when one or more of the members of the combined group engage in business only within the State of West Virginia, but one or more other members of the combined group engage in business activities partially in West Virginia and partially outside of West Virginia.

7.3.a.1.B. If all business activities of all combined group members take place entirely within West Virginia, then the entire net income of each combined group member is subject to the West Virginia corporation net income tax without apportionment.

7.3.a.2. Example -- General Apportionment Formula:

The following is an example of how the apportionment formula works in the context of the corporation net income tax:

A hypothetical corporation has facilities and operations in Pennsylvania, West Virginia, New York, and California.

The corporation has sales in 47 of the 50 states of the USA.

The apportionment formula is as follows:

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Federal Taxable Income -- The corporation has $10,000,000 federal taxable income from all operations in the USA after West Virginia modifications and adjustments. These modifications and adjustments are, for certain items that are required to be added to, or subtracted from, federal taxable income before apportionment.

Average value of property in the USA -- The total average value of property owned and leased by the corporation during the tax year in the USA (including property in Pennsylvania, West Virginia, New York, and California) is $517,050,000.

Average value of property in the West Virginia -- The total average value of property owned and leased by the corporation during the tax year in West Virginia is $15,000,000.

Payroll in the USA -- The total annual payroll paid to all employees of the corporation in the USA (including payroll paid in Pennsylvania, West Virginia, New York, and California) during the tax year is $65,628,000.

Payroll in West Virginia -- The total annual payroll paid to all employees of the corporation in West Virginia is $2,499,000.

Sales in the USA -- The total sales of the corporation in the entire USA (all of the 47 states in which the corporation has sales) are $435,009,000.

The corporation sells almost all of its production outside of West Virginia.

Sales in West Virginia -- The total sales of the corporation in West Virginia are $4,000.

The apportionment formula, using these values, would be as follows:

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The math works out as follows:

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0.016777 -- This is the apportionment factor.

Assuming that the corporation has no allocable WV income, out of all of the operations in the USA, slightly over one percent (i.e., 0.016777) of the operations of the corporation are attributable to West Virginia operations and activity.

Net federal taxable income from all operations in the USA, after WV modifications and adjustments is $10,000,000.

Applying the apportionment formula, West Virginia taxable income is:

Federal Taxable Income (After Adjustments)	Apportionment Factor	WV Taxable Income
$10,000,000	x	0.016777	=	$167,770.00

The final computation of the tax is as follows. The hypothetical corporation has federal taxable income after modifications and adjustments allocated and apportioned to West Virginia in the amount of $167,770.00. The tax rate for the given year is 8.75%.

Tax is .0875 x $167,770.00 = $14,679.88 (rounded)

Tax is $14,679.88.

7.3.b. Example. -- Pro Inc. is a service corporation doing business in several states, including West Virginia. Pro Inc. owns no property anywhere. In this case, the allocation formula for Pro Inc. will be:

WV Payroll + 2. (WV Sales) + 0 WV Property

Total Payroll (Total Sales) 0 Total Property

If, for some unusual reason, a corporation has no sales anywhere, since the sales factor is double weighted, the overall denominator would be reduced by 2.

7.4. "Business activities" include all activities engaged in by the corporation, and includes those activities giving rise to both business income and nonbusiness income.

7.4.a. All income of a corporation, including both business income and nonbusiness income, is apportioned, except nonbusiness income specifically identified in W. Va. Code § 11-24-7(d), which is allocated.

7.4.a.1. All other nonbusiness income and all business income shall be apportioned.

7.4.b. Where a corporation has business activities that are in West Virginia and other states, its other net nonbusiness income that was not allocated under W. Va. Code § 11-24-7(d) and all of its net business income will be apportioned.

7.5. Property factor.

7.5.a. Property factor. -- The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used by it in this State during the taxable year and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used by the taxpayer during the taxable year, which is reported on Schedule L of Federal Form 1120, plus the average value of all real and tangible personal property leased and used by the taxpayer during the taxable year.

7.5.a.1. The common law definition of real and personal property shall be used, (i.e., real property is land and all things firmly and permanently attached to the land, and personal property is all other property).

7.5.a.2. Only real and tangible personal property is counted in the property factor. The common law definition of tangible personal property shall be used. Examples of tangible personal property include, but are not limited to, books, equipment, supplies, inventories and virtually any other form of personalty that can be held or touched. Tangible personal property does not include money, chooses in action, or any other intangibles.

7.5.a.3. The average value of real and tangible personal property means the beginning and ending year balances of the relevant accounts reported on Schedule L of Federal Form 1120, or its successor. However, the Tax Commissioner may require use of a monthly average of the accounts or any other determination of the average value of the property that is appropriate for an accurate determination of the factor.

7.5.b. Value of property.

7.5.b.1. Property owned by the taxpayer shall be valued at its original cost, adjusted by subsequent capital additions or improvements to the property and by partial or total disposition of the property by reason of sale, exchange, abandonment, loss or destruction or other alienation of, or loss of, the property. Where records of original cost are unavailable or cannot be obtained without unreasonable expense, property shall be valued at current market value. Property rented by the taxpayer from others shall be valued at eight times the net annual rental rate. The term "net annual rental rate" is the annual rental paid, directly or indirectly, by the taxpayer, or for its benefit in money or other consideration for the use of the property.

7.5.b.1.A. Net annual rental rate includes any amount payable for the use of real or tangible personal property, or any part of the property, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.

7.5.b.1.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 the like are also included in the term "net annual rental rate." If a payment includes rent and other charges which are not separately set forth, the amount of rent shall be determined by consideration of the relative values of the rent and the other items.

7.5.b.1.C. Real or personal property owned by one corporation which is used in this State by another corporation to which the property is rented is to be included in the property factor by both corporations unless the rental income is nonbusiness income to the receiving corporation.

7.5.b.1.C.1. Example. -- X Corporation owns certain real property located in West Virginia, which is leased by Y Corporation for the entire taxable year of both corporations. Rental income received by X Corporation is allocated to the State of West Virginia and the value of the property is not included in the apportionment factor for X Corporation's apportionable income in either the numerator of the property factor (value of taxpayer's West Virginia real and tangible personal property) and in the denominator of the property factor (value of taxpayer's real and tangible personal property owned or rented by the taxpayer for the taxable year). Eight times the annual rental rate of the property will be included in both the numerator and the denominator of the property factor for Y Corporation.

7.5.c. Movable property.

7.5.c.1. The value of movable tangible personal property used both within and outside of this State shall be included in the numerator to the extent of its use in this State. The extent of use in this State is determined by multiplying the original cost of the property by a fraction, the numerator of which is the number of days of physical location of the property in this State during the taxable period, and the denominator of which is the number of days of physical location of the property everywhere during the taxable period. The number of days of physical location of the property may be determined on a statistical basis or by any other reasonable method acceptable to the Tax Commissioner.

7.5.d. Leasehold improvements.

7.5.d.1. For purposes of the property factor, leasehold improvements are treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or whether the improvements revert to the lessor upon expiration of the lease. Leasehold improvements are included in the property factor at their original cost.

7.5.d.1.A. Example. -- Alpha Corporation leases a building to Beta Corporation. The building is located in West Virginia. Beta Corporation makes certain leasehold improvements to the property totaling $100,000 some of which the lease permits Beta Corporation to remove. The entire value of the leasehold improvements is included in Beta Corporation's property factor. The value of the leasehold improvements is also included in Alpha Corporations property factor.

7.5.e. Average value of property.

7.5.e.1. The average value of property is determined by averaging the values of the property at the beginning and the ending of the taxable year.

7.5.e.1.A. If there are substantial fluctuations in the values of property during the taxable year, or where property is acquired or disposed of after the beginning of the taxable year, or where the rental or lease contract ceases before the end of a taxable year, the Tax Commissioner may require the averaging of monthly values of the property during the taxable year or the pertinent part of the taxable year.

7.5.e.1.A.1. If a unitary member does not have nexus with the state of West Virginia, or if the unitary member is not taxable by West Virginia under the protections of Public Law 86-272. (15 U.S.C.A. § 381), then that unitary member's income shall be included in the combined report of the combined group. However, that unitary member's factor attributes shall not be included in the numerator of the property factor but shall be included in the denominator of the property factor when the tax return is prepared, and for combined group members, when the combined report is prepared.

7.6. Payroll factor.

7.6.a. The payroll factor is a fraction, the numerator of which is the total compensation paid in this State during the taxable year by the taxpayer for compensation, and the denominator of which is the total compensation paid by the taxpayer during the taxable year, as shown on the taxpayer's federal income tax return filed with the Internal Revenue Service, as reflected in the schedule of wages and salaries and that portion of cost of goods sold which reflects compensation, or as shown on a pro forma return.

7.6.b. Compensation.

7.6.b.1. The term "compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services. Payments made to an independent contractor or to any other person not properly classified as an employee shall be excluded. Only those amounts paid directly to employees are included in the payroll factor. Amounts considered as paid directly to employees include the value of board, rent, housing, lodging and other benefits or services furnished to employees by the taxpayer in return for personal services, provided the amounts constitute income to the recipient for federal income tax purposes. Compensation for each employee shall be the amount of wages and salary shown on the Federal Form W-2. for the employee, in accordance with federal income tax law.

7.6.b.2. Employee.

7.6.b.2.A. For purposes of determining the payroll factor, an employee is any officer of a corporation or any individual who, under the usual common-law rule applicable in determining the employer-employee relationship, has the status of an employee.

7.6.b.2.B. An employee is a person in the service of another under any contract of hire, express or implied, oral, or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed.

7.6.c. When compensation is paid in this State.

7.6.c.1. Compensation is paid or accrued in this State if an employee's services are performed entirely within this State or if an employee's services are performed both within this State and outside of this State, but the services performed outside of this State are incidental to that employee's services within this State. The converse is not true. In all circumstances, services performed in this State are to be included in the payroll factor as services performed in this State. "Incidental", as used in this paragraph, means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction. Compensation is also paid or accrued in this State if some of the employee's service is performed in this State and the employee's base of operation, or if there is no base of operation, the place from which the service is directed or controlled is in this State, or the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the employees residence is within this State.

7.6.c.2. As used in this subdivision, the term "base of operations" is the place of more or less permanent nature from which the employee starts his or her work and to which he or she customarily returns in order to receive instructions from the taxpayer or communications from his or her customers or with other persons or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his or her trade or profession at some other point or points. The term "place from which the service is directed or controlled" refers to the place from which the power to direct or control is exercised by the taxpayer.

7.6.c.3. Example. -- P Corporation has salesmen in several states. West Virginia customers are serviced by a salesman living in Ohio. The salesmen are directed from a regional office located in Pennsylvania. Compensation attributable to the time spent in West Virginia on employer business would be included in the taxpayer's West Virginia payroll factor.

7.6.c.4. If a unitary member does not have nexus with the state of West Virginia, or if the unitary member is not taxable by West Virginia under the protections of Public Law 86-272. (15 U.S.C.A. § 381), then that unitary member's income shall be included in the combined report of the combined group. However, that unitary member's factor attributes shall not be included in the numerator of the payroll factor but shall be included in the denominator of the payroll factor when the tax return is prepared, and for combined group members, when the combined report is prepared.

7.7. Sales factor.

7.7.a. The sales factor is a fraction, the numerator of which is the gross receipts of the taxpayer derived from transactions and activity in the regular course of its trade or business in this State during the taxable year, less returns, and allowances attributable to the gross receipts from the West Virginia activity. The denominator of the fraction is the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business during the taxable year and reflected in its gross income reported and as appearing on the taxpayer's Federal Form 1120, and consisting of those certain pertinent portions of the elements of gross income set forth. If either the numerator or the denominator includes interest or dividends from obligations of the United States government which are exempt from taxation by this State, the amount of the interest and dividends, if any, shall be subtracted from the numerator or denominator in which it is included.

7.7.a.1. The only sales to be included in the sales factor are those which produce business income.

7.7.a.2. Rules for determining sales in certain circumstances.

7.7.a.2.A. 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 in the ordinary course of its trade or business. 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 taxes) shall be included as part of such receipts if such taxes are reflected in the taxpayer's gross income reported and as appearing on the taxpayer's Federal Form 1120.

7.7.a.2.B. In the case of cost fixed fee contracts, such as the operation of a government-owned plant for a fee, "sales" includes the entire reimbursed cost, plus the fee.

7.7.a.2.C. In the case of a taxpayer engaged in providing services, such as the operation of an advertising agency, or the performance of equipment service contracts, or research and development contracts, "sales" includes the gross receipts from the performance of the services including fees, commissions, and similar items.

7.7.a.2.D. In the case of a taxpayer engaged in renting real or tangible property, "sales" includes the gross receipts from the rental, lease, or licensing of the use of the property.

7.7.a.2.E. 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.

7.7.b. In filing returns with this State, if the taxpayer departs from or modifies the basis for excluding or including gross receipts in the sales factor used in returns for prior years, the taxpayer shall disclose that information by attaching a statement, setting forth the nature and effect of the change, to the corporation net income tax return for the current year.

7.7.c. Sales factor denominator.

7.7.c.1. The denominator of the sales factor includes the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business, unless otherwise excluded in this rule.

7.7.d. Sales factor numerator.

7.7.d.1. The numerator of the sales factor shall include gross receipts attributable to this State and derived by the taxpayer from transactions and activity in the regular course of its trade or business. All interest income, service charges, carrying charges, or time-price differential changes incidental to the gross receipts shall be included regardless of the place where the accounting records are maintained or the location of the contract or other evidence of indebtedness.

7.7.d.2.Joyce or Finnegan.

The Joyce case and the Finnegan case were tax matters brought before the California State Board of Equalization B

Appeal of Joyce, Inc., 66 SBE 069, 1966 WL 1411 (Cal. St. Bd. Eq.) (Nov. 23, 1966).

Appeal of Finnigan Corp., 88- SBE-022-A, 1990 WL 15164 (Cal. St. Bd. Eq.) (Jan. 24, 1990).

The issue for which these cases have become known relates to the determination of the sales that are included in the numerator of the sales factor for purposes of the apportionment formula.

In synopsis, the basic distinction is as follows:

Joyce -- If a unitary group member has nexus with the state, then "in state" gross receipts of that member are included in the sales factor numerator, but not if the member does not have nexus with the state, determined on a "stand alone" basis.

Finnigan -- If one or more unitary group members has nexus with the state, then "in state" gross receipts of all unitary group members are included in the sales factor numerator, including "in state" gross receipts of a unitary group member that, itself, does not have nexus with the state, determined on a "stand alone" basis.

West Virginia is a "Joyce State."

If the unitary member does not have nexus with West Virginia or if the unitary member is not taxable under the protections of PL 86-272, then that unitary member's gross receipts derived from transactions and activity in the regular course of its trade or business in West Virginia are not included in the numerator of the sales factor when the tax return is prepared, and for combined group members, when the combined report is prepared.

7.7.e. Dock sales.

7.7.e.1. Where tangible personal property is sold and the terms of the sale require the purchaser to pick up the property or otherwise receive the property in this State, the sale is to be treated as a sale taking place in this State for purposes of the sales factor.

7.7.e.2. In the case of sales requiring by their terms delivery of tangible personal property by common carrier, contract carrier or by other means of transportation excluding pickup by the customer in this State, whether directly or indirectly, the place at which the property is ultimately received after all transportation has been completed shall be considered as the place at which the property is received by the purchaser.

7.7.e.3. Direct delivery in this State, other than for purposes of transportation, to a person or firm designated by a purchaser constitutes delivery to the purchaser in this State regardless of where title passes or other conditions of sale.

7.7.e.4. Direct delivery outside this State to a person or firm designated by a purchaser does not constitute delivery to the purchaser in this State, regardless of where title passes or other conditions of sale.

7.7.e.5. Examples.

7.7.e.5.A. Baubles, Inc. is located in Huntington, West Virginia, and makes sales of tangible personal property to an Ohio company. The terms of the sale require the Ohio company to pick up the merchandise from the loading dock at Baubles. The sale is to be treated by Baubles as a sale taking place in this State.

7.7.e.5.B. Alpha Corporation, which manufactures a highly sophisticated device used in mining, purchases certain tangible personal property from a company located in Virginia. Alpha Corporation, located in Bergoo, West Virginia is required by the terms of the sales contract to pick up the merchandise at the Virginia company's loading dock in Virginia. The sale is to be treated as not occurring in West Virginia by the Virginia company absent other nexus with West Virginia.

7.7.e.5.C. RPS, Inc., is located in Morgantown, West Virginia and makes sales of tangible personal property. Some of the sales contracts require RPS to ship the goods to companies located outside of this State via common carrier. The sales of the tangible personal property shipped by the carrier are not included as West Virginia sales.

7.7.f. Special rules.

7.7.f.1. Where substantial amounts of gross receipts arise from an incidental or occasional sale of a fixed asset used in the regular course of the taxpayer's trade or business, the gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale of a factory or plant will be excluded.

7.7.f.2. Insubstantial amounts of gross receipts arising from incidental or occasional transactions or activities may be excluded from the sales factor unless the exclusion would materially affect the amount of income apportioned to this State. For example, the taxpayer ordinarily may include or exclude from the sales factor gross receipts from such transactions as the sale of office furniture, business automobiles, etc.

7.7.f.3. Where the income producing activity of a taxpayer other than a banking or financial institution in respect to business income from intangible personal property can be readily identified, the income is included in the denominator of the sales factor and, if the income producing activity occurs in this State, the numerator of the sales factor as well. For example, usually the income producing activity can be readily identified in respect to interest income received on deferred payments on sales of tangible property and income from the sale, licensing, or other use of intangible personal property.

7.7.f.4. Where the business income from intangible property cannot readily be attributed to any particular income producing activity of a taxpayer other than a banking or financial institution, the income cannot be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor. For example, where business income in the form of dividends received on stock, royalties received on patents or copyrights, or interest received on bonds, debentures, or government securities results from the mere holding of the intangible personal property by the taxpayer, the dividends and interest shall be excluded from the denominator of the sales factor.

7.7.g. Allocation of sales of tangible personal property.

7.7.g.1. Sales of tangible personal property are in this State if the property is received in this State by the purchaser, other than the United States government, regardless of the f.o.b. point or other conditions of the sale. In the case of delivery by common carrier or other means of transportation, the place at which the property is ultimately received after all transportation has been completed shall be considered as the place at which the property is received by the purchaser, regardless of where title passes or other conditions of sale. Direct delivery in this State, other than for purposes of transportation, to a person or firm designated by the purchaser, constitutes delivery to the purchaser in this State, and direct delivery outside this State to a person or firm designated by the purchaser does not constitute delivery to the purchaser in this State, regardless of where title passes or other conditions of sale. The sales of tangible personal property are also in this State if the property is shipped from an office, store, warehouse, factory, or other place of storage in this State and the purchaser is the United States government.

7.7.g.2. Throw-out rule -- All other sales of tangible personal property delivered or shipped to a purchaser within a state in which the taxpayer is not taxed are excluded from the denominator of the sales factor. This is commonly known as the throw-out rule.

7.7.g.2.A. "Not taxed in another state" means in that state the taxpayer is not subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporation stock tax or that a state has no jurisdiction to subject the taxpayer to a net income tax.

7.7.g.2.B. Application of throw out rule when computing the unitary group's sales factor denominator in the group's combined report. - W. Va. Code § 11-24-13a(a) provides that the use of a combined report does not disregard the separate identities of the taxpayer members of the combined group. Consequently, the throw-out rule is applied on a corporation-by-corporation basis and is not applied as if the combined group were a single taxpayer, to determine the denominator of the sales factor for each member of the combined group included in the combined report. The separate corporation sales factor denominators are then aggregated to determine the denominator of the sales factor of the combined group.

7.7.g.2.B.1. Example 1. When all sales of tangible personal property produce income from unitary group business activity. - A combined group engaged in unitary business activity consists of Corporations A, B, C and D. The combined group makes sales to customers in States 1, 2, 3, 4, 5 and 6. But not every member of the combined group makes sales to customers in all of those states and, in some of the states, the member is not subject to an income tax because of Public Law 86-272. When computing the denominator of the combined group's sales factor for purposes of the West Virginia combined report, the throw-out rule will be applied separately to each member of the combined group and the aggregate adjusted denominator will be the sales factor denominator for the combined group engaged in unitary business activity.

Sales Factor Denominator
Before Throw-out	After Throw-out
Corporation A	$ 5 million	$ 5 million
Corporation B	$ 5 million	$ 4 million
Corporation C	$ 5 million	$ 4.5 million
Corporation D	$ 5 million	$ 3 million
Total	$20 million	$16.5 million

7.7.g.2.B.2. Example 2. When some but not all sales of tangible personal property produce income from unitary group business activity. - A combined group engaged in unitary business activity consists of Corporations A, B, C and D. Corporations A and C also have income from business activity that is not unitary business activity. The combined group makes sales to customers in States 1, 2, 3, 4, 5 and 6. But not every member of the combined group makes sales to customers in all of those states and, in some of the states, the member is not subject to an income tax because of Public Law 86-272. Because Corporations A and C have receipts from sales of tangible personal property that produce business income from unitary business activity and receipts from sales of tangible personal property that produces business income from other business activities that are not unity business activities, the sales factor numerators and denominators of Corporations A and C shall be further analyzed so that only sales of tangible personal property from unitary business activity are included when apportioning the business income from unitary business activity. When computing the denominator of the combined group's sales factor for purposes of the West Virginia combined report, the throw-out rule will be applied separately to each member of the combined group and the aggregate adjusted denominator will be the sales factor denominator for the combined group engaged in unitary business activity.

7.7.g.2.B.3. Example 3. - When a partnership owned in part by a corporation has taxable nexus in one or more states into which the corporation sells tangible personal property, but the corporation does not otherwise have taxable nexus with those states. C A combined group engaged in unitary business activity consists of Corporations A, B, C and D. The combined group makes sales to customers in States 1, 2, 3, 4, 5 and 6. However, Corporations A and C do not sell tangible personal property to customers in all of those states or, in some of the states, Corporations A and C are not subject to an income tax because of application of Public Law 86-272. Corporations A and C each own an interest in partnerships engaged in unitary business activity with the combined group. These partnerships do have taxable nexus with states into which Corporations A and C sell tangible personal property and in which Corporations A and C do not have taxable nexus if their partnership interests are disregarded. For taxable years beginning after December 31, 2008, each corporation's share of the property, payroll and sales factors of the partnerships are included in the property, payroll, and sales factors of their corporate owners. As a consequence, all members of the combined group have taxable nexus with all of the states into which they sell tangible personal property, and the throw-out rule does not apply to this combined group.

7.7.h. Allocation of other sales.

7.7.h.1. Sales, other than sales of tangible personal property are in this State if the income-producing activity is performed in this State or the income-producing activity is performed both in and outside this State and a greater proportion of the income-producing activity is performed in this State than in any other state, based on costs of performance, or the sale constitutes business income to the taxpayer, or the taxpayer is a financial organization not having its commercial domicile in this State, and in either case the sale is a receipt described as attributable to this State in W. Va. Code '11-24-7b.

7.7.i. If a unitary member does not have nexus with the State of West Virginia, or if the unitary member is not taxable by West Virginia under the protections of Public Law 86-272. (15 U.S.C.A. § 381), then the unitary member's income shall be included in the combined report of the combined group. However, that unitary member's sales factor attributes shall not be included in the numerator of the combined group's sales factor, but subject to the provisions of paragraph 7.7.g.2. of this rule, may be included in the denominator of the payroll sales factor of the combined group. However, if the member has sales of tangible personal property subject to the throw-out rule, then its sales factor attributes for those sales of tangible personal property not taxed in another state are excluded from both the numerator and the denominator of the sales factor of the combined group.

7.7.j. The term "income-producing activity" applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gain or profit. The activity does not include transactions and activities performed on behalf of the taxpayer, such as those conducted on its behalf by an independent contractor. "Income-producing activity" includes, but is not limited to:

7.7.j.1 Rendering of personal services by employees with use of tangible and intangible property by the taxpayer in performing a service;

7.7.j.1.A. The sale, rental, leasing, licensing, or other use of real property;

7.7.j.1.B. The sale, rental, leasing, licensing, or other use of tangible personal property; or

7.7.j.1.C. The sale, licensing, or other use of intangible personal property. The mere holding of intangible property is not, in itself, an income-producing activity: Provided, That the conduct of the business of a financial organization shall constitute an income-producing activity.

7.7.k. The term "cost of performance" means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer.

7.7.l. Application and special rules.

7.7.l.1. Gross receipts from the sale, lease, rental, or licensing of real property are located in this State if the real property is located in this State.

7.7.l.2. Gross receipts from the sale, rental, lease, or licensing of tangible personal property are in this State if the property is located within this State. The rental, lease, licensing or other use of tangible personal property in this State is a separate income producing activity from the rental, lease, licensing or other use of the same property while located in another state; consequently, if property is within and without this State during the rental, lease, or licensing period, gross receipts attributable to this State shall be measured by the ratio which the days the property was physically present or was used in this State bears to the total days of the physical location or use of the property everywhere during that period, including the days it was physically located or used in a state in which the taxpayer is not taxed within the meaning of that term as provided in subparagraph 7.7.g.2.A of this rule.

7.7.l.3. Example. -- The taxpayer is the owner of ten railroad cars. During the current tax year, the total of the days each railroad car was present in this State was 60 days. The receipts attributable to the use of each of the railroad cars in this State are a separate item of income and shall be determined as follows:

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7.7.l.4. Gross receipts for the performance of personal services are attributable to this State to the extent the services are performed in this State. If services relating to a single item of income are performed partly within and partly outside of this State, the gross receipts for the performance of the services shall be attributable to this State only if a greater proportion of the services was performed in this State, based upon costs of performance. Usually, where services are performed partly within and partly outside of this State, the services performed in each state constitute a separate income producing activity; in that case the gross receipts for the performance of services attributable to this State shall be measured by the ratio which the time spent in performing the services in this State bears to the total time spent in performing such services everywhere, including the time spent in performing the services in a state in which the taxpayer was not taxed within the meaning of that term as provided in subparagraph 7.7.g.2.A. of this rule.

7.7.l.5. Example. -- Taxpayer, a road show, gave theatrical performances at various locations in State X and in this State during the tax period. All gross receipts from performances given in this State are attributable to this State as each performance is a separate income producing activity.

7.7.l.6. Example. -- Taxpayer, a public opinion survey corporation, conducted a poll by its employees in State F and in this State for the sum of $10,000. The project required 800-man hours to obtain the basic data and to prepare the survey report. Three hundred of the 800-man hours were expended in this State. The receipts attributable to this State are: 300/800 X $10,000 = $3,750.

7.7.l.7. Example. -- Boil Laboratories, Inc. performs certain medical tests. Boil Laboratories is located in Virginia, where all analysis is performed. Boil Labs also has a location in this State where tissue specimens are collected, as well as a truck and routeman in this State who collects samples from various doctor's offices and hospitals. Boil Labs has a similar set-up in Virginia. It costs Boil Labs $18 to analyze each specimen. All but $5 of the $18 of these costs are incurred in the State of Virginia. Each sample or specimen is a separate income-producing activity and is not the sale of tangible personal property. Since the income-producing activity is performed both in and outside of this State, and a greater proportion of the income producing activity is not performed in this State, then none of the charges for the analysis of samples or specimens drawn in this State will be included as sales in this State for purposes of the sales factor.

7.8. Termination Date. -- This section heading 7 will terminate and have no force or effect for tax years beginning on or after January 1, 2022, except for those taxpayers using the transition rules set forth in section heading 6a.

W. Va. Code R. § 110-24-7