Utah Rules That Leased Employees’ Wages Should Be Included in the Payroll Factor
Utah determined that the wages of leased employees should be included in the payroll factor because the taxpayer determined the hours and conditions of the leased employees and exercised the type of control that indicates an employer-employee relationship.
When computing the business income taxable by a particular state, a business will typically apportion federal taxable income (with some state-specific adjustments) to that state using a formula. About half of the states require the use of a three-factor formula based on the extent of the business’ property, payroll and sales activity. 
The general framework for the three-factor apportionment of business income, and, in particular, the definitions of the property and payroll factors, is largely consistent among the states owing to their use of the Uniform Division of Income for Tax Purposes Act (UDITPA) as the basis for their state apportionment laws.  A recent decision by the Utah Tax Commission provides insight on what should be in the payroll factor under these rules. 
In the decision, a taxpayer made used of leased employees at its Utah location. Even though these personnel were technically the employees of the leasing company that paid their wages and reported their payroll taxes, Utah determined that their wages should be included in the computation of the taxpayer’s payroll factor due to the fact that the state defined the term “employee” for apportionment purposes to mean “an individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.”  Despite their employment on paper, the leasing company had no actual or constructive control over the work performed by these employees. The taxpayer determined the hours and conditions of the leased employees and otherwise exercised the type of control that indicates an employer-employee relationship under common law, thus requiring the inclusion of their compensation in the taxpayer’s apportionment.
Even more telling, Utah went one step further in its decision, finding that even if the leased personnel were not considered employees under common law, the taxpayer still should have included their wages in the payroll factor. This is under the basis of the state’s provisions for equitable adjustment of the apportionment formula when it does not fairly represent the extent of a taxpayer’s activity in the state, which is also pulled from UDITPA and found across many states’ apportionment statutes.  In other words, excluding leased employees may be considered to not fairly represent a taxpayer’s in-state activity.
This ruling can be instructive for businesses required to use a three-factor formula in Utah and in the other states that continue to make use of a payroll factor and the standard UDITPA definitions. Further, several states that do not follow UDIPTA may incorporate similar language regarding the definition of an employee and allowing for equitable apportionment adjustments. Businesses that extensively make use of leased employees should consider this when preparing their state tax returns, as either the opportunity for tax savings or a potential risk of tax exposure may exist in the states that utilize a property factor in their apportionment formula. HA&W’s SALT team can assist businesses with these issues.
Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at firstname.lastname@example.org for more information.
 The weight applied to each factor may vary from state to state, and there is a strong movement among states toward the use of a single-factor formula based on sales alone.
 UDITPA is a model agreement for consistent income tax apportionment that has been enacted in state law to varying degrees by 24 states.
 UT State Tax Commission Ruling on Appeal Nos. 05-0594 & 05-1764
 Utah Admin. R. R865-6F-8(1)(g)(ii)
 See UT Code Ann. §59-7-320 and reference UDITPA Section 18
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