Visit allocation for more information. {g3;VL4M|_s9[)WHyg2SN1plQT3oAIKZbz/W4U,YH3$buq~\d"7*Zf`q6rZOseXxQLkXIr.6NXe4n8 5I]~^o|ZlE7HSAr Fg#V. Confirmation that the apportionment rules for partnerships in which an interest is held by an apportioning corporation also apply to tiered partnerships. Therefore, it may 18 section 17951-4(g) through (i) for information regarding computation of the payroll factor. Unitary corporations, partnerships, and LLCs must apply the more than 50% test to the business receipts of the entire group. Accordingly, the critical element in determining whether income is business income or nonbusiness income is the identification of the transactions and activities that are the elements of a particular trade or business. We translate some pages on the FTB website into Spanish. FY 22-23 Q3 (added 17-Feb-2023) Third Quarter Apportionment for the Education Protection Account, Fiscal Year 2022-23. Refer to R&TC Section 24358. 18 sections 25137-4.2 and 25137-10. Enter the total separately apportionable business income (loss) on Schedule R, Side 1, line 11 and California separate business income (loss) apportionments on Schedule R, Side 2, line 29. For the requirements that must be satisfied in order for a corporation to be deemed a key corporation, see Cal. Rented property is valued at eight times the net annual rental rate. Property owned by the corporation is valued at its original cost. Nonbusiness income is allocated to specific states as provided in R&TC Sections 25123 through 25127 and the applicable regulations. The purpose of the California Department of Education PASE contacts listserv is to provide LEAs and other interested parties important information, such as notifications regarding software releases, key deadlines, reminders of due dates for submission of data, and any other pertinent topics related to the Principal Apportionment. Each member then applies its own nonbusiness income or loss and its own net operating loss (if applicable) to that amount to arrive at the corporate taxpayers net income (loss) for state purposes. 1061 and see Cal. T6~|yC ![a>lSHy:MVR[aUa~$yx1HDV;KaBEt4X!x/2`R@|9`G[O@#)9k4eA8c0iKv;;1'ei3{JEin@5"{Q qgTBh&kXIIg1b!nk&iL*VVZ1L: *UIv=XMs\u3M:r %vB|SQgkHGsYc$\2k:&48vshG:0%Ls!\2E:YtPotA }A~4) }|u{UO_G/}`o u 1 FTB Notice of Proposed Rulemaking (Nov. 3, 2017, available here); FTB December Draft Language, Proposed Regulations Sections 25137-1 and 17951-4 (Dec. 18, 2017, available here). Code Regs., tit. SubscribeDonate Search Federal Taxes Individual and Consumption Taxes Income and Payroll Taxes Tax Expenditures, Credits, and Deductions Tax Compliance and Complexity Excise and Consumption Taxes Therefore, Corporation D must file a California return to pay the minimum tax. The net annual rental rate for any item of rented property is the total annual rents paid for the property, less the aggregate annual subrental rates paid by subtenants if the subrents constitute nonbusiness income. The California Supreme Court held that the definition of business income contains both a transactional test and a functional test and includes income from the sale of a business asset or right, even if the income is derived from an extraordinary event (Hoechst Celanese Corp. vs. Answer: A nonresident individual with income from a business, trade, or profession who must apportion its business income to California under CCR section 17951-4 must use the single-sales factor for taxable years beginning on or after January 1, 2013, unless more than 50% of the gross receipts were derived from a QBA. Since 2010, Washington uses a single sales/receipts factor apportionment formula. Cal. In any case in which the tax of a corporation is or has been determined in a combined report with another corporation, all dividends paid by one to another of such corporations are, to the extent dividends are paid out of the earnings and profits of the unitary business, eliminated from the income of the recipient and are not taken into account for interest offset purposes. Jill's sole proprietorship is carrying on a business in and out of California and will be required to apportion its income to California using UDITPA rules. Nonbusiness income is not subject to apportionment. Nonbusiness Income - means all income other than business income. For the 2013 taxable year, what formula does Group X need to use to apportion its business income to California? The following special rules apply to gain or loss from the sale by a corporation of a nonbusiness partnership interest: Nonresidents and resident individuals eligible for the other state tax credit who have income or loss from a trade or business activity conducted within and outside California generally must apportion their income in accordance with the provisions of R&TC Sections 25120 through 25141 (see Cal. A tax return for each corporation subject to the Corporation Tax Law is required, unless Schedule R-7 is filed with the FTB. A dividend from Corporation X paid to Corporation Y is business income. Special instructions apply to individuals, partnerships and limited liability companies (LLCs). determining the source of income allocated to a non-resident taxpayer by a partnership.3 The FTB also announced that written comments will be accepted until 5 p.m. on March 5, 2018, for modifications made to the FTB's proposed amendments to CCR Sections 17951-4 and 25137-1, related to apportionment and allocation of partnership income. However, if goods are transferred to the purchasers employee or agent at some other location in California and the purchaser immediately transports the goods to another state, the sale is not a California sale. Corporations filing on a waters-edge basis that own controlled foreign corporations must complete form FTB 2416, Schedule of Included Controlled Foreign Corporations (CFC), included in the Form 100W Tax Booklet, and attach it to Form 100W, California Corporation Franchise or Income Tax Return Waters-Edge Filers. If you have any questions related to the information contained in the translation, refer to the English version. on Pet. For purposes of Schedule R-4, partnerships or LLCs should not allocate nonbusiness income from intangibles. 18 section 25136-2, for more information. The FTB will review and respond to written comments as part of the compilation of the rulemaking file.21. The Franchise Tax Board (FTB) may require or allow monthly averaging if this method is required to properly reflect the average value of property for the taxable year. Doing Business in California and Other States General partnerships that do business in California and other states must apportion their income using Apportionment and Allocation of Income (Schedule R) (PDF). Expanded Learning Opportunities Program; and funding for several other programs. The First Principal Apportionment (P-1), certified by February 20, is based on the first period data that LEAs report to the California Department of Education (CDE) in November through January. 18 section 25136-2(h)(2)(A). A trade or business with income inside and outside of California may be subject to California apportionment and allocation rules. Our goal is to provide a good web experience for all visitors. 2) Failure to indicate each members correct self-assessed tax liability may result in incorrect processing if separate assessments or refunds are required. If an apportioning trade or business conducted by a partner or member is unitary with the apportioning trade or business of the partnership or LLC, the partners or members distributable share of business income of the partnership is generally treated as business income of the partner. If an electing member(s) Schedule R-7 election is disallowed, they must file a separate California return. The employees service is performed entirely within California. For a complete listing of the FTBs official Spanish pages, visit La esta pagina en Espanol (Spanish home page). RTC 25135(a) & (b) and regulations thereunder. Sales from services are assigned to California to the extent that the purchaser of the service receives the benefit of the service in California. Although throwback rules are more common, three states adopt what are known as throwout rules. Based on the case summarized above, that means that the Florida shareholder will now have to pay California income tax on the gain recognized by the S corporation from its sale of assets. We do not control the destination site and cannot accept any responsibility for its contents, links, or offers. Click Basic Information in the . Answer: Corporation G exceeds the sales thresholds for doing business in California under RTC Section 23101(b), therefore it has a filing requirement in California. R&TC Section 25135(b) adopted the Finnigan rule in assigning sales from tangible personal property. Determination of whether the distributive share of income from a non-unitary partnership is treated as apportionable business income or allocable non-business income is based on the activities of the non-unitary partnership. The Education Protection Account (EPA) web page provides information on LEA's EPA entitlements, the resulting impact to state funding, and frequently asked questions. This Google translation feature, provided on the Franchise Tax Board (FTB) website, is for general information only. Gross receipts from sales of tangible personal property with a destination in California (except sales to the U.S. government) are attributable to California if the property is delivered or shipped to a purchaser within California regardless of the freight on board point or other conditions of sale. (2) Limitation on low-income housing credit allowed. We translate some pages on the FTB website into Spanish. Code Regs., tit. See R&TC Section 25106 for more information. By filing a single group tax return and the completed Schedule R-7, each electing member indicates acceptance of all terms and conditions set forth in Schedule R-7. See how we connect, collaborate, and drive impact across various locations. If the employees service is performed both within and outside of California, the employees compensation will be attributed to California if any of the following apply: The employees base of operations is in California. For more information, see Schedule CA (540). Each of the following categories uses a different process to assess the amount of tax for an individual state return. Apportionment and allocation. Generally, sales between members of a combined group are not reflected in the combined reporting groups sales factor because such sales have no economic impact outside the combined reporting group and do not generate income.14 The original version of CCR Section 25137-1 did not explicitly provide that sales between a unitary partnership and other members of the taxpayers combined reporting group should not be reflected in the combined groups sales factor.15 In the December Draft Language, the FTB proposed amending CCR Section 25137-1 to explicitly provide that such sales should be eliminated from the combined groups sales factor.16 The proposed revision is retained in the 15 Day Draft Language. These changes include important modifications to the apportionment formula that California used to determine the California-source income of multistate corporate taxpayers for income and franchise tax purposes. RTC Code 25137 - 25137. Apportionment - Generally refers to the division of business income among states by the use of an apportionment formula. Do not enter an amount on Schedule R, line 1a or line 13. Qualified group means a combined reporting group that satisfies the following conditions: (1) Has satisfied the minimum investment requirement for the taxable year; (2) The combined reporting group derived more than 50% of its United States network gross business receipts from the operation of one or more cable systems. The market assignment method and single-sales factor apportionment may result in California sourced income or apportionable business income if a taxpayer is receiving income from intangibles or services from California sources. 18 section 25136-2, for more information. In addition, most states adopting market-based sourcing require or allow taxpayers to elect to use a single-factor sales apportionment formula. Use the form locator for prior years. The denominator is the total gross receipts derived during the taxable year from transactions and activities everywhere in the regular course of the corporations trade or business. The property and payroll factors from the special regulations are not used. The most recent IRS data shows that the number of PTEs has more than quadrupled since 1980. The idea is to allocate income or loss based on taxable activities in each state. Under the accrual method, all compensation properly accrued is deemed to have been paid. Property acquired by an agent on behalf of another. 55 Furthermore, CCR Section 25106.5 . Example 4 - In conducting its multistate manufacturing business, Corporation C systematically sells and replaces automobiles, machines, and other equipment used in the business. Under the New Apportionment Rules Taxpayers are now able to elect between two different apportionment regimes for determining California-source business income: (1) a new single-sales factor apportionment formula based on market sourcing or (2) the continued use of a double-weighted sales factor apportionment formula based on costs of performance The interest income is business income. The remaining 18 floors are leased to others. ESEA (ESSA): Title I, Part A, Basic Grants Low-Income and Neglected, and Revenue Object Code 8290, All Other Federal Revenue. If there is no change in the method used, check the No box. See R&TC Sections 25128.7 and 25128 for information regarding single-sales factor or three-factor formulas, R&TC Sections 25129 through 25141 for apportionment rules, and the regulations supporting these code sections. California apportionment and allocation of partnership incomeproposed FTB amendments, Telecommunications, Media & Entertainment, Application of 25137-1(a) to tiered partnerships, Determination of distributive share of income from non-unitary partnerships, Elimination of intercompany sales between partnerships and other members of combined group, CCR 17951-4(d) and 25137-1 applicable to partners and partnerships engaged in a unitary enterprise, Deloitte Tax LLP's Multistate Tax practice, FTB December Draft Language, Proposed Regulations Sections 25137-1 and 17951-4, FTB 15 Day Draft Text for 15 Day Notice, Proposed Regulations Sections 25137-1 and 17951-4, Title 18, Sections 25137-1 and 17951-4 (page 2. DTTL and each of its member firms are legally separate and independent entities. 7, of the Corporation Tax Law (other than organizational expenses). Follow apportionment and allocation rules if your trade or business has a net loss. Approximately 3.8 million entities filed returns as partnerships in 2019, the most recent year for which data is available. CCR Section 25137-1(a) provides the general rules for determining whether a corporations distributive share of partnership income is sourced to California where a corporation has an interest in a partnership and either the corporation or the partnership (or both) have income from sources within and without California.10 The December Draft Language seeks to clarify that CCR Section 25137-1 applies not only to partnership interests held directly by corporations but also to lower-tier partnerships that are held indirectly by corporations. Example: In 2000, David's Toy, Inc., a Nevada S corporation, opens an office in California. Individuals and partners engaged in the practice of a profession may be subject to special rules for determining the payroll factor. Additionally, economic uncertainty caused by the COVID - 19 pandemic, potential increases in interest rates and income tax rates . 2023. 7 In the FTBs Initial Statement of Reasons for the Amendment of California Code of Regulations, Title 18, Sections 25137-1 and 17951-4 (page 2) (available here) (Initial Statement of Reasons) and its 15 Day Draft Language (page 10), the FTB deletes the provisions relating to long-term contracts and instead provides that CCR Section 25137-2 applies to long-term contracts. California net income is apportioned business income plus allocated nonbusiness income to California. P-2 2nd 390, the California Court of Appeal found R&TC Section 24402 to be unconstitutional. iii. Then, each taxpayer member applies the federal netting rules to its share of post-apportioned business gain/loss items and its California-source nonbusiness gain/loss items. For individuals, such income is allocated under the rules applicable to individuals as if earned directly. tax guidance on Middle Class Tax Refund payments, General information for the Middle Class Tax Refund, Application and Interpretation of Public Law 86-272 (FTB 1050), Corporation Tax Booklet Water's-Edge Filers (Form 100W), California Corporation Franchise or Income Tax Return - Water's-Edge Filers (Form 100W), Apportionment and Allocation of Income (Schedule R), The property is delivered or shipped to a purchaser in California, The property is shipped from California to a state where the taxpayer is not taxable or the purchaser is U.S. government, Sales from services are in California to the extent the purchaser of the service received the benefit of the services in California, Sales from intangible property are in California to the extent the property is used in California. Sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in California. The sales, as defined in R&TC Section 25120(e) or (f), of the taxpayer in California, including sales by the taxpayers agents and independent contractors, exceed the lesser of $610,395 or 25% of the taxpayers total sales. Gross receipts from other than tangible personal property are assigned to California using market assignment. Example 3 - Corporation B is engaged in the multistate business of manufacturing and selling industrial chemicals. 18 section 25120(a) as income arising from transactions and activities in the regular course of the corporations trade or business. Do not include Social Security numbers or any personal or confidential information. See Specific Line Instructions for Schedule R-1 for more information. These pages do not include the Google translation application. Example: Joe was a California resident all of 2000 and a partner in a California partnership. Sales means gross receipts from transactions in the regular course of an apportioning trade or business (see R&TC Section 25120(e) and (f)(1)). The Annual Apportionment, certified by February 20 in the following year, is based on annual data that LEAs report to CDE. Code Regs., tit. Consult with a translator for official business. In connection with that business, Corporation B obtained patents on some of its products. If you have any questions regarding the FTBs Preliminary Report or other California tax matters, please contact any of the following Deloitte Tax professionals: Valerie C. Dickerson, partner, Washington National Tax, Deloitte Tax LLP, Washington DC, +1 202 220 2693, Gregory Bergmann, partner, Deloitte Tax LLP, Chicago, +1 312 486 9811, Christopher Campbell, principal, California Technical/Controversy lead, Deloitte Tax LLP, Los Angeles, +1 213 553 3072, Steve West, managing director,California Technical lead, Deloitte Tax LLP, Los Angeles, CA, +1 213 688 5339, Shirley J. Wei, senior manager, California Technical/Controversy lead, Deloitte Tax LLP, Los Angeles, CA, +1 213 553 1715, Brian Toman, tax specialist leader, California Technical/Controversy lead, Deloitte Tax LLP, San Francisco, +1 415 783 6137. Allocation refers to the assignment of nonbusiness income to a particular state. See General Information H, Computation of Apportionment Percentage, or R&TC Section 25128(b) for more information. 1061 for examples of the computational detail that should be provided. Visit the Application and Interpretation of Public Law 86-272 (FTB 1050) for more information. Business income is income from the regular course of trade or business and/or income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the corporations regular trade or business operations. This applies to all apportioning trades or business, including corporations, pass-through entities, and nonresidents. The old building was rented to an investment company under a five-year lease. Reimbursable Snow Removal Annual Amount for Fiscal Year 2022-23 New. Code Regs., tit. 18 sections 25106.5 through 25106.5-10, and the instructions in FTB Pub. In both cases, the state using the throwout or throwback . Any data corrections are reflected with the subsequent years certifications. When a corporations income is from sources both within and outside California, the portion of the corporations total net income that has its source in California is determined using R&TC Sections 25120 through 25141 and the applicable regulations, which generally conform to the Uniform Division of Income for Tax Purposes Act. 2 FTB 15 Day Notice (Feb. 15, 2018, available here); FTB 15 Day Draft Text for 15 Day Notice, Proposed Regulations Sections 25137-1 and 17951-4 (Feb. 15, 2018, available here). Franchise Tax Board, (2001) 25 Cal. The unitary method of computing California income is required when two or more corporations are engaged in a unitary business, a portion of which is carried on in California. 19 FTB 15 Day Notice, p.2; FTB 15 Day Draft Language, p.18. However, the corporation is not taxable in another state if the corporation meets any of the following: The second test applies if the corporations business activities are sufficient to give the state jurisdiction to impose a net income tax under the Constitution and statutes of the United States. In its Initial Statement of Reasons, the FTB stated that [s]ome taxpayers have asserted that an interest in a partnership that conducts business within and without California comes under the purview of [CRTC Section] 17952.17 To clarify that CRTC Section 17952 did not apply, the FTB, in the December Draft Language, originally included a statement in CCR Section 17951-4(d) that [CRTC Section] 17952 is not applicable in determining the source of income allocated to the nonresident taxpayer by the partnership.18 After initial public comments were received, the FTB has deleted this language in the 15 Day Draft Language.19, In the December Draft Language, the FTB also proposed amending Regulation Section 17951-4(d) to state that [i]f the partnership and the business activity of the partner are part of one unitary business, then the rules of [Regulation Section 25137-1(f)] apply and the apportionment of the partnership business income is done at the partner level for the unitary partner or partners.20 This proposed revision is retained in the 15 Day Draft Language, Taxpayers with ownership interests in tiered partnership structures, including those that sell a partnership interest, should consult their tax practitioners to evaluate how the FTBs proposed amendments to CCR Sections 25137-1 and 17951-4 may impact their businesses and whether the submission of written comments to the FTB merits consideration. The Principal Apportionment includes funding for the Local Control Funding Formula, which is the primary source of an LEA's general purpose funding; Special Education (AB 602); What formula does John W need to use to apportion his business income to California? Category 1: A handful of states continue to apply only the transactional test for making the apportionable business versus allocable nonbusiness income distinction (as opposed to both the transactional and functional tests, which would likely render the gain apportionable business income). Certain services may not be available to attest clients under the rules and regulations of public accounting. 28,69- ,03,699/ The return of income filed by the assessee was selected for scrutiny assessment and the Assessing Officer vide order dated 29/01 . 18, 25137-1(a). Sole proprietors and partners engaged in the practice of law, accounting, medicine, engineering, or any other profession involving personal services where capital is not a material income producing factor should refer to Cal. In Line 5 - Code for apportionment . If an electing member(s) Schedule R-7 election is disallowed, they must file a separate California return. Pursuant to CCR Section 25137-1(g), if a partnership and its corporate partner are not engaged in a unitary business (disregarding ownership requirements), the distributive share of income allocated to the corporate partner is treated as income from a separate trade or business.11To accompany the December Draft Language, the FTB issued its Initial Statement of Reasons for the Amendment of California Code of Regulations, Title 18, Sections 25137-1 and 17951-4 (Initial Statement of Reasons). Is Partnership A required to provide information to its partners on their pro rata share of the California and everywhere property, payroll, and sales? Failure to complete all of the items requested in this election may result in: 1) incorrect processing of the tax return; 2) electing member(s) Schedule R-7 election may be disallowed. The designated key corporation makes the election on behalf of itself and the electing taxpayer members by completing Schedule R-7 and attaching the schedule to the return. QBAs include: Use Instructions for Schedule R to help you calculate the factors. (a) In general. Consult with a translator for official business. Amounts realized from exchanges of inventory that are not recognized under the IRC. The corporations California source net income is the sum (or net) of the business income apportioned to California, income from a trade or business conducted totally in California, plus the nonbusiness income items directly allocated to California. However, CRTC Section 17952 provides that income for nonresidents from an intangible personal property is not California source income absent a business situs in California. Doing Business in California and Other States S corporations that do business in California and other states must apportion their unitary business income using Schedule R, Apportionment and Allocation of Income. For specific rules related to PA source income and apportionment and allocation rules, see 61 Pa. Code 101.8 and 109.1-109.9. For the 2013 taxable year, what formula does S Corporation A need to use to apportion its business income to California? 18 section 17951-4(d)(1). A tool is available to assist LEAs with calculating blended LCFF funding rates for reorganizing school districts. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons. Schedule R will be required. Scenario: Corporation F is an air transportation company that uses the special industry allocation and apportioning rules under CCR Section 25137. Impacted by California's recent winter storms? Answer: Apportioning trades or businesses (including pass-through entities) that use a special formula under CCR sections 25137-1 to -14 must use the single-sales factor to apportion its business income to California except for those that derive more than 50% of their gross business receipts from QBAs. Any differences created in the translation are not binding on the FTB and have no legal effect for compliance or enforcement purposes. In the FTBs Initial Statement of Reasons, the FTB stated that despite this explicit rule, some taxpayers have asserted that in accordance with [CRTC Section] 23040, which addresses sourcing income to California from intangible property, the income allocated must be treated as nonbusiness income because a partnership interest qualifies as intangible property.12As a result, the FTB proposed amending CCR Section 25137-1(a) to clarify that the determination of whether the distributive share of income from non-unitary partnerships is treated as apportionable business income or allocable non-business income is made at the partnership level based on the partnerships trade or business activities, and not CRTC Section 23040.13This proposed revision is retained in the 15 Day Draft Language. Example 1 - Corporation Y owns 30% of Corporation X. Allocation and apportionment in U.S. tax differ in that allocation covers non-business income, while apportionment covers business income. In the case of marketable securities, sales are in California if the customer is in California, Sales from the sale, lease, rental, or licensing of real property are in California if the real property is located in California, Sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in California. Search. In states that apply a business income versus nonbusiness income distinction (such as California), nonbusiness income is specifically allocated. We translate some pages on the FTB website into Spanish. For forms and publications, visit the Forms and Publications search tool. The two methods available are. The U.S. Supreme Court held Californias interest offset provision (R&TC Section 24344(b)) to be unconstitutional in circumstances in which nonbusiness dividends or interest which are allocated outside of California exist within a unitary group (Hunt-Wesson vs. Gross receipts means gross sales less returns and allowances and includes all interest income, service charges, carrying charges, or time-price differential charges incidental to these gross receipts. For more information, see Cal. Corporate Income Tax Legislative update: What happened in 2016? of the sales factor would lower the overall amount of income that is apportioned to California from $33.3 million to $27.5 million (that is, [.5 + .4 + 2 * .1]/4 times $100 million). This can result in an erroneous assessment of minimum tax to the parent corporation. 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Tax Legislative update: what happened in 2016 amount on Schedule R california apportionment and allocation of income help you the... Caused by the use of an apportionment formula assess the amount of tax for an individual state.. Partnerships and limited liability companies ( LLCs ) its member firms are legally separate and independent entities LLCs not. An amount on Schedule R, line 1a or line 13 data corrections are reflected the! The more than quadrupled since 1980 rented to an investment company under a five-year lease rental.... Translation application applies to all apportioning trades or business should not allocate nonbusiness income to a particular state, for... 17951-4 ( d ) ( 2 ) Limitation on low-income housing credit allowed Social Security numbers or any or. Clients under the rules and regulations thereunder times the net annual rental.. Corporation, see Schedule CA ( 540 ) business gain/loss items and its California-source gain/loss... Is to provide a brief summary of specific multistate developments relevant to taxpayers tax. Destination site and can not accept any responsibility for its contents, links, or licensing of tangible personal are! And have no legal effect for compliance or enforcement purposes data shows that the number of has! Or loss based on annual data that LEAs report to CDE should not allocate nonbusiness income to?... Applicable to individuals, partnerships or LLCs should not allocate nonbusiness income to California ( added 17-Feb-2023 Third. File a separate California return although throwback rules are more common, three states adopt are! Pandemic, potential increases in interest rates and income tax rates year for which data is available an is... Is to provide a brief summary of specific multistate developments relevant to taxpayers tax! ) Limitation on low-income housing credit allowed is an air transportation company that uses special! 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