The Delaware State Bank Commissioner proposes to amend Regulation 1114 (Alternative Franchise Tax), which would change the current bank alternative franchise tax apportionment methodology. Interested parties may offer comments on the proposed amended regulation, or submit written suggestions, data, briefs or other materials to the Office of State Bank Commissioner as to whether the proposed amended regulation should be adopted, rejected or modified. Comments must be received on or before November 3, 2014.


For tax years beginning after 2006, Delaware has allowed taxable financial institutions subject to the bank franchise tax to elect an alternative filing methodology, which more closely resembled traditional income tax apportionment, than the historical method provided by statute. Under this alternative method, banks (and subsidiary corporations that elected to be taxed under the bank franchise tax scheme) were entitled to apportion their income using a three-factor methodology, which accurately reflected the proportion of in-state property, payroll, and sales relative to property, payroll and sales everywhere. The sales factor in this calculation was double-weighted. As originally conceived, the alternative method required banks to add their net operating income before taxes to the net operating income before taxes of any subsidiary corporation electing to be included, and then apportioned income using the consolidated apportionment factor for the entire group.

Proposed Rule

Under the proposed regulation, each entity included in the alternative bank franchise tax return would calculate its apportionment factor separately, and multiply that separately computed apportionment factor by its net operating income before taxes. Each entity, therefore, would be calculating its Delaware sourced-income on a separate basis, and the separately calculated income would be totaled to arrive at the combined Delaware sourced income for the group for inclusion on the tax return.

A simple example shows the possible impact of the change. Assume, for purposes of this example, a bank and a subsidiary that elects to be subject to the alternative franchise tax. The bank and the subsidiary are identical except for two key distinctions. The bank makes a profit of $10 and has a 100 percent apportionment factor (on a stand-alone basis) in Delaware. The subsidiary loses $5 and has 0 percent apportionment (again, on a stand-alone basis) to Delaware. Under the current methodology, since the two companies are identical, we can average their apportionment factors and come up with a consolidated apportionment of 50 percent. Likewise, we can add the income of one and the loss of the other (for purposes of this simple example, we will assume there are no intercompany transactions between the two) to come up with a net consolidated income of $5. The $5 of income, at 50 percent apportionment, means that the Delaware sourced income of the group is $2.50 ($5 X 50 percent), which would then be subject to tax.

The calculation is different under the proposed methodology. Under the proposed regulation, we would apply 100 percent apportionment to the bank’s $10 of income to arrive at $10 of Delaware-sourced income for the bank. Likewise, for the subsidiary, we would apply its 0 percent apportionment to the $5 loss and get $0 of Delaware-sourced income for the subsidiary. Adding the $10 of post-apportionment bank income with the $0 of post-apportionment subsidiary income, we arrive at $10 of combined group income subject to the bank franchise tax rate under the proposed regulation, as compared to the $2.50 of taxable income under the current method.

Pepper Points

The principal difference between the two methods is that the current method uses a single apportionment factor that is weighted by the relative contribution of each member of the group to apportion income that has been consolidated. Under this methodology, an individual member’s contribution to the group can be inflated or diluted relative to its contribution to the apportionment factor. Under the proposed method, the income or loss contributed to the group more closely reflects the activity of the individual member of the group on a stand-alone basis.