Case Studies - Apportionment & Allocation

Please use the following facts and data from the attached worksheet to calculate DAC Pack Company's 3-factor apportionment percentage (double-weighted sales factor) for State "A." All the information provided relates to calendar year 2023.

Facts:

1. DAC Pack is a leading global manufacturer of sports equipment and clothing, known mainly for its alpine skis and tennis racquets.
2. DAC Pack's U.S. headquarters facility is located in State "A," a separate company reporting state. DAC Pack is incorporated in State "A." - property factor
3. DAC Pack has manufacturing sites and distribution centers in State "A" and various other states.
4. DAC Pack is subject to corporate income tax in every state except for Arkansas and Oklahoma.
5. In addition to its employee complement, DAC Pack also uses independent contractors (non-employees) to assist with distribution center operations during peak periods. In 2023, DAC Pack spent $570,000 for the services of independent contractors.
6. Compensation paid to Dac Pack's President, CEO, CFO, and Vice-Presidents totaled $2,600,000. All of the company's officers are based at Dac Pack's headquarters in State "A."
7. On July 1, 2023, DAC Pack sold certain older manufacturing equipment in State "B" to a local company. This equipment had been idle for the past 3 years.The relevant information pertaining to this transaction:
   1. Cost basis of manufacturing equipment = $2,000,000 (at beginning of year). These assets are included in the apportionment data provided. - subtract from property
   2. Total proceeds from sale of equipment = $3,000,000.Net gain from sale of equipment = $2,500,000.
8. DAC Pack received dividend income from its foreign (non-U.S.) subsidiaries. State "A" allows a 100% dividends received deduction for foreign dividends (i.e., this income is excluded from the tax base).
9. DAC Pack received royalty income from its foreign (non-U.S.) subsidiaries for the use of manufacturing-related patents and know-how in their operations. These royalties were paid pursuant to licensing agreements.
10. During 2023, DAC Pack sold its minority interest (10%) in the stock of an unrelated business that was being held as an investment.Proceeds from the stock sale were $400,000. DAC Pack will treat this as nonbusiness income for state income tax purposes, allocable to State "A."

Assumptions - State "A" general apportionment rules

1. 3-factor apportionment method is used - property, payroll, and receipts (double-weighted receipts factor)
2. Property owned is valued at original cost. The property values are averaged at the beginning and end of the year. Rented property is valued at 8 times the annual rent expense.
3. Assets no longer used for business purposes - considered idle property and excluded from property factor after not being used for greater than 2 years
4. Officers' compensation is excluded from the payroll factor
5. Receipts factor:
   1. Interest is assigned to the state of commercial domicile
   2. Dividends are assigned to the state of commercial domicile
   3. Royalties are assigned to the location where the intangibles are used
   4. "Throwback" sales rule applies
   5. Sales of assets used in business - gross amount realized (gross proceeds), not net gain. Is reported for apportionment purposes

TAX 360 - STATE AND LOCAL TAX DACPACKCOMPANY CASE STUDY - APPORTIONMENT & ALLOCATION APPORTIONMENT DATA 2023 | BEGINNING OF YEAR -1/1/2023 END OF YEAR - 12/31/2023 Everywhere State "A" Other States Everywhere State "A" Other States Property (at Cost] Inventory 3,200,000 500,000 2,700,000 2,600,000 400,000 2,200,000 Buildings 68,000,000 18,000,000 50,000,000 68,000,000 18,000,000 50,000,000 Machinery & Equipment (a) 52,000,000 9,500,000 42,500,000 54,000,000 9,700,000 44,300,000 Fumniture & Fixtures 16,000,000 5,000,000 11,000,000 14,800,000 4,800,000 10,000,000 Intangible Assets 80,000,000 80,000,000 - 80,000,000 80,000,000 - Land 24,000,000 3,500,000 20,500,000 24,000,000 3,500,000 20,500,000 Rent Expense - Calendar Year 2023 3,200,000 800,000 2,400,000 (a) Property everywhere includes idle property in State "B" with a total cost basis of $2,000,000 Payroll Everywhere State "A" State "B" State "C" Other States | Wages and Salaries (b) 22,000,000 8,000,000 2,700,000 1,800,000 9,500,000 Payments to Independent Contractors 570,000 150,000 100,000 100,000 220,000 (b) Wages everywhere Includes compensation paid to executives in the amount of $2,600,000 Receipts Everywhere State "A" State "B" State "C" Other States Sales of tangible personal property 800,000,000 40,000,000 18,000,000 25,000,000 717,000,000 Interestincome 4,800,000 4,800,000 - Dividend income 1,200,000 1,200,000 Royalty income 16,000,000 16,000,000 Foreign countries Gross proceeds from sales of business assets 2,000,000 600,000 200,000 10,000 1,190,000 Net gain (loss) from sale of business assets 400,000 100,000 60,000 (150,000) 390,000 Gross proceeds from sale of idle manufacturing equipment 3,000,000 3,000,000 - Net gain from sale of idle manufacturing equipment 2,500,000 2,500,000 Proceeds from sale of minority interest in stock of unrelated company (c) 400,000 400,000 (c) Treated as nonbusiness income, allocable to State A Shipments of Product from Stat o destination states: Alabama 250,000 Arkansas 600,000 Colorado 7,200,000 Idaho 6,000,000 Oklahoma 500,000 Tennessee 800,000 All other states 40,000,000