Idaho Administrative Code › Title IDAPA 35 - Tax Commission, State › Rule 35.01.01 - INCOME TAX ADMINISTRATIVE RULES › Section 35.01.01.342 - PRINCIPLES FOR DETERMINING THE EXISTENCE OF A UNITARY BUSINESS: DESCRIPTION AND ILLUSTRATION OF FUNCTIONAL INTEGRATION, CENTRALIZATION OF MANAGEMENT AND ECONOMIES OF SCALE

Current through August 31, 2023
Section
				63-3027, Idaho Code
01.
Functional Integration
.
			 Functional integration refers to transfers between, or pooling among, business
			 activities that significantly affect the operation of the business activities.
			 Functional integration includes, but is not limited to, transfers or pooling
			 with respect to the unitary business's products or services, technical
			 information, marketing information, distribution systems, purchasing, and
			 intangibles such as patents, trademarks, service marks, copyrights, trade
			 secrets, know-how, formulas, and processes. There is no specific type of
			 functional integration that must be present. The following is a list of
			 examples of business operations that can support the finding of functional
			 integration. The order of the list does not establish a hierarchy of
			 importance. (4-6-23)
a. Sales, exchanges, or
			 transfers (collectively "sales") of products, services, or intangibles between
			 business activities provide evidence of functional integration. The
			 significance of the intercompany sales to the finding of functional integration
			 will be affected by the character of what is sold and the percentage of total
			 sales or purchases represented by the intercompany sales. For example, sales
			 among business entities that are part of a vertically integrated unitary
			 business are indicative of functional integration. Functional integration is
			 not negated by the use of a readily determinable market price to effect the
			 intercompany sales, because such sales can represent an assured market for the
			 seller or an assured source of supply for the purchaser. (4-6-23)
b. Common Marketing. The sharing of common
			 marketing features among business entities is an indication of functional
			 integration when such marketing results in significant mutual advantage. Common
			 marketing exists when a substantial portion of the business entities' products,
			 services, or intangibles are distributed or sold to a common customer, when the
			 business entities use a common trade name or other common identification, or
			 when the business entities seek to identify themselves to their customers as a
			 member of the same enterprise. The use of a common advertising agency or a
			 commonly owned or controlled in-house advertising office does not by itself
			 establish common marketing that is suggestive of functional integration. (Such
			 activity, however, is relevant to determining the existence of economies of
			 scale and centralization of management.) (4-6-23)
c. Transfer or Pooling of Technical
			 Information or Intellectual Property. Transfers or pooling of technical
			 information or intellectual property, such as patents, copyrights, trademarks
			 and service marks, trade secrets, processes or formulas, know-how, research, or
			 development, provide evidence of functional integration when the matter
			 transferred is significant to the businesses' operations. (4-6-23)
d. Common Distribution System. Use of a
			 common distribution system by the business entities, under which inventory
			 control and accounting, storage, trafficking, or transportation are controlled
			 through a common network provides evidence of functional integration.
			 (4-6-23)
e. Common Purchasing.
			 Common purchasing of substantial quantities of products, services, or
			 intangibles from the same source by the business entities, particularly where
			 the purchasing results in significant cost savings or where products, services,
			 or intangibles are not readily available from other sources and are significant
			 to each entity's operations or sales, provides evidence of functional
			 integration. (4-6-23)
f. Common or
			 Intercompany Financing. Significant common or intercompany financing, including
			 the guarantee by, or the pledging of the credit of, one (1) or more business
			 entities for the benefit of another business entity or entities provides
			 evidence of functional integration, if the financing activity serves an
			 operational purpose of both borrower and lender. Lending which serves an
			 investment purpose of the lender does not necessarily provide evidence of
			 functional integration. (See Subsection
			 342.02 of this rule for
			 discussion of centralization of management.) (4-6-23)