Signed by Gov. Steve Bullock on May 3, 2017, Montana House bill 511 will revise the state’s conformity with the Multistate Tax Compact, implementing the changes recommended by the Multistate Tax Commission. Effective for tax years beginning on or after January 1, 2018, Montana joins the growing number of states that have enacted market-based sourcing for income tax apportionment.
The current cost of performance method for sourcing sales of personal property that is other than tangible will be replaced with the Multistate Tax Compact’s recommended market-based method. With this method, the taxpayer’s market for the sale will be in Montana pursuant to these classifications:
- The sale, rental, lease or license of real property—to the extent the property is in Montana
- The rental, lease or license of tangible personal property—to the extent the property is in Montana
- The sale of a service—to the extent the service is delivered to a Montana location
- Intangible property that’s rented, leased or licensed—to the extent the property is used in Montana
- Intangible property that’s sold—to the extent the property is used in Montana
If the state of assignment can’t be determined using the above criteria and a reasonable approximation can’t be made, then the receipts should be excluded when determining the receipts factor. In addition, any receipts assigned to a state where the taxpayer isn’t taxable also will be excluded, i.e., thrown out, of the receipts factor.
Other notable revisions include:
- Definitions of business income, nonbusiness income, sales and sales factor are replaced with apportionable income, nonapportionable income, receipts and receipts factor, respectively.
- The use of any alternative apportionment method must be proven with a preponderance of evidence by the party petitioning that the current apportionment method doesn’t fairly represent the taxpayer’s activity in the state, and that the proposed alternative is reasonable.
The revised law also mandates that pass-through entities with business activity within and outside of Montana—including any partnership, S corporation or disregarded entity that isn’t owned by an individual, estate or trust—must calculate their Montana source income according to Montana’s corporate income tax allocation and apportionment provisions.
To learn more about how this new law could affect your organization, contact your BKD advisor.