March 6, 2019
MHCS --- The Iowa Department of Revenue issued a declaratory order on how transportation brokerage companies and other similar transportation service providers allocate revenues for state income tax apportionment.
In this recent case, the taxpayer was a transportation brokerage specialist who connected clients needing goods transported with transportation providers. The taxpayer did not physically transport any goods, however it apportioned its revenues using the specific allocation rules allowed for transportation service companies, which based the allocation on miles in a state compared to total miles.
The Director of the Iowa Department of Revenue concluded that since the taxpayer did not physically move the goods, the allocation should be based on the service provider rules. Under these rules, the revenue should be allocated based on where the benefit of the service was received, which in this case was the location of where the delivery was received. For example, if the delivery of goods the brokerage company coordinated was made to an Iowa location, the revenue from that delivery would be allocated to Iowa and therefore be considered Iowa revenue for the brokerage company.
This is an important ruling because often times transportation companies automatically use the transportation service company rules, apportioning revenues based on mileage in a state even though they are not actually moving goods.
For the 2018 tax year, transportation companies providing brokerage services should revisit how revenue is apportioned and determine whether the mileage apportionment rules apply, or if, like the case of the transportation brokerage company, the service provider apportionment rules apply.
It should be noted that this does not impact the apportionment for transportation companies who physically haul goods. MHCS has an experienced transportation team along with a knowledgeable state and local tax team who are closely watching this development. Please contact MHCS at (515) 288-3279 to discuss how this new ruling may apply to your specific situation.