What is zero? 0? Nothing? Nil? What is de minimis? Trifling? Negligible?

In World Acceptance Corp. & World Fin. Corp. of Kentucky v. Kentucky Dep’t of Revenue, Civil Action No. 14-CI-01193, (Ky. Franklin Cir. Ct. Nov. 10, 2015), the Franklin Circuit Court of Kentucky, on a motion to alter, amend, or vacate, affirmed the Kentucky Board of Tax Appeals, Final Order No. K-24682, File No. K13-R-18, dated August 29, 2014, and held that World Acceptance Corp. (WAC) and its subsidiary, World Finance Corporation of Kentucky (WFCKY), should not file a Kentucky mandatory nexus consolidated return under KRS 141.200(9) to (11), concluding that “WAC was not an ‘includable corporation’ because WAC’s payroll, property, and sales factors were either de minimis or zero.”  World Acceptance is on appeal at the Court of Appeals.

Computing the Kentucky taxable income of WAC and WFCKY using the consolidated return method results in a refund. Not surprisingly, WAC and WFCKY were arguing that they should compute their income using the consolidated return method, and the Department took the opposite position.

The focus on World Acceptance has been on the construction and application of the mandatory nexus consolidated return rules. But, does World Acceptance have something to say about apportionment and nexus?

Kentucky’s Three-Factor Apportionment of Income for Tax Purposes

Kentucky apportions income using an apportionment factor comprised of the average of three ratios – the payroll factor, the property factor, and a double-weighted sales factor. KRS 141.120. Each factor is comprised of a numerator representing the in-state amount and a denominator representing the amount everywhere. KRS 141.120. In this regard, Kentucky apportions income consistent with the Uniform Division of Tax Purposes Act (UDITPA). 

WAC’s Presence in Kentucky

Contrast WAC, the parent corporation, and WFCKY, WAC’s subsidiary. “WAC, a South Carolina corporation, had…one employee performing services in Kentucky.” World Acceptance, supra. “WFCKY is a corporation with over seventy storefronts in Kentucky which provide consumer loan and tax preparation services.” Id. Obviously, WFCKY has a substantial presence in Kentucky, and WAC has comparatively much less.

“[WAC’s] employee performed audit services and worked between 39 and 55 days in Kentucky…. This employee was a resident of Tennessee and she performed audit services for WAC in Tennessee as well. She received her assignments, schedules and payroll from the corporate headquarters in South Carolina.” Id. “This employee used a car and a laptop when she worked in Kentucky.” Id. “The only sales that WAC had in Kentucky…consisted of a management fee that WAC received from WFCKY each year to cover the cost of management, accounting, payroll and administrative activities that WAC performs for its subsidiaries…in South Carolina.” Id.

World Acceptance provides an opportunity to explore the edges of what de minimis or zero apportionment might be.

WAC’s Payroll Factor

The analysis in World Acceptance began with the payroll factor, likely because WAC’s primary contact with Kentucky was through just one employee. Payroll is assigned to the Kentucky numerator if: [1] the individual's service is performed entirely within Kentucky; [2] the individual's service is performed both within and without Kentucky, but the service performed without the state is incidental to the individual's service within Kentucky; [3] some of the service is performed in Kentucky and the base of operations is in Kentucky; [4] some of the service is performed in Kentucky and Kentucky is the place from which the service is directed or controlled; or, [5] some part of the service is performed, but the individual's residence is in this state. See KRS 141.120; 103 KAR 16:090.

Notice that the assignment of payroll to Kentucky (or not) is an all-or-nothing determination -- either all of an employee’s payroll is assigned to Kentucky or nothing is. The KBTA and the Franklin Circuit Court determined that “WAC’s payroll factor was zero” based on this test. The employee’s service was not performed entirely in Kentucky, was incidental to the Tennessee service (not to the Kentucky service), and was directed and controlled by a corporation based in South Carolina; and, she did not live in Kentucky. The base of operations test was not addressed but that test does not seem to be implicated from the operative facts.

So, despite the fact that WAC had an employee who worked in Kentucky between one and two months performing audit services, it was determined that WAC had a zero Kentucky payroll factor. What would have been the conclusion if there were two such employees? Ten such employees? A dozen? Dozens? Based on the Court’s logic, wouldn’t there still be zero payroll in each of these scenarios?

WAC’s Property Factor

The property that WAC had in Kentucky consisted of a car registered in Tennessee that the employee drove and a laptop that she used in Kentucky. In contrast to the payroll factor, the property factor numerator is comprised of “the average value of the corporation’s real and tangible personal property owned or rented and used in this state during the tax period….” KRS 141.120.