BKD’s Top 10 State Income/Franchise Tax Developments
Author: Mary Reiser
Arkansas will conform to the federal S election, and it won’t allow treatment as a C corporation for state income tax purposes. It also will mandate the use of apportionment under the Uniform Division of Income for Tax Purposes Act for partnerships with income inside and outside of Arkansas. These changes are effective for tax years beginning on or after January 1, 2018.
In Swart Enterprises, Inc. v. Franchise Tax Board, the California 5th Appellate District Court of Appeals determined a passive, minority member of a manager-managed limited liability company (LLC) wasn’t doing business in the state for purposes of the franchise tax. The court concluded its 0.2 percent minority interest and the management limitations dictated in the LLC’s operating agreement didn’t allow Swart the ability to manage, control or act on the LLC’s behalf. The Franchise Tax Board didn’t appeal the decision.
Illinois increased income tax rates effective July 1, 2017. Taxpayers can choose to use a blended tax rate based on the number of days in the tax year before and after July 1, 2017, or specific accounting. Rates for individuals, trusts and estates jumped from 3.75 percent to 4.95 percent. Rates for C corps jumped from 5.25 percent to 7 percent. Replacement tax rates remain the same. The state also reinstated the research and development tax credit for five more years and decoupled from the domestic production activities deduction for tax years ending on or after December 31, 2017.
The Kansas Legislature repealed the exemption of certain pass-through and other income reported on federal Form 1040 Schedules C, E and F. As a result, individuals will now be subject to income tax on any Kansas-sourced income reported on these forms for tax years beginning on or after January 1, 2017. Taxpayers won’t be subject to penalty and interest on any underpayment of estimated taxes provided tax is remitted no later than April 17, 2018. In addition, the state increased individual income tax rates for 2017 and 2018.
Michigan has repealed mandatory flow-through withholding for tax years beginning after June 30, 2016. In other developments, the U.S. Supreme Court denied certiorari to seven Michigan taxpayers contesting the retroactive repeal of the Multistate Tax Compact, which allowed the election of equally weighted three-factor apportionment for Michigan business tax purposes. While there are still Multistate Tax Compact cases proceeding in Oregon (Health Net) and Texas (Graphic Packaging), taxpayers’ hopes are dimming in light of these and other denials for review by the court.
As of April 10, 2017, New York revised its individual income tax law to provide that a nonresident partner in a partnership must allocate the gain associated with the sale or transfer of a partnership interest subject to Internal Revenue Code Section 1060 consistent with the state’s allocation rules in the year the assets were sold or transferred. Essentially, this revision forces nonresident partners to treat the sale of a partnership interest as a sale of assets and not the sale of intangible personal property allocable entirely outside the state.
For tax years beginning on or after January 1, 2018, taxpayers can make an election to file one municipal income tax return with the Ohio Department of Taxation (the Department) that would include the tax for every Ohio municipality in which the entity is required to file. The election must be made on paper or the Department’s registration portal by the first day of the third month of the taxable year. The Department will manage payment allocation to municipalities as well as oversee all audits and appeals associated with these returns.
Effective July 1, 2017, out-of-state retailers are subject to the economic nexus standard of either $267,000 in sales or 25 percent of sales in Washington for business and occupation tax purposes.
The new standard applies in addition to the historical physical presence standard.
The March Toward Market-Based Sourcing
Montana and Oregon are joining a growing list of states adopting market-based sourcing for sales other than tangible personal property. The new sourcing methods will become effective for tax years beginning on or after January 1, 2018. Tennessee adopted market-based sourcing and a triple-weighted sales factor for tax years beginning on or after July 1, 2016. It added an elective single-factor option for Tennessee manufacturers for tax years beginning on or after January 1, 2017.
New Year’s Resolutions Include Amnesty
Ohio, Rhode Island and Texas have all announced upcoming tax amnesty programs. Ohio’s program will begin January 1, 2018, and end February 15, 2018, offering full penalty and 50 percent interest abatement. Rhode Island’s program begins December 1, 2017, and ends February 15, 2018, providing full penalty and 25 percent interest abatement. Texas hasn’t released the timing and terms of its amnesty program, so watch for more information in 2018.
Contact your trusted BKD advisor with questions or for more information.