Income and franchise tax
Illinois
Gross receipts voted down;other changes enacted
Illinois’ proposed gross receipts tax was voted down in the House, but Illinois lawmakers passed new “loophole closing”corporate tax legislation. Gov. Rod Blagojevich signed Senate Bill 1544 (SB1544) on Aug. 16, which included the highlights listed below. All changes are effective for tax years ending on or after Dec. 31, 2008, unless other wise noted.
- Changes to income tax base
SB 1544 provides several changes to the corporate income tax base, including:
- Income from U.S. Treasury obligations remains nontaxable, but the nontaxable amount is reduced by interest expense incurred on indebtedness to carry the bond, expenses to produce the income and all other related expenses.
- Insurance premium expenses payable to a unitary captive insurance company must be added back to federal income.
- With exceptions, interest and intangible expenses paid or accrued to unitary insurance, transportation and financial organizations must be added back to federal income.
- Deductions for dividends paid to a captive real estate investment trust (REIT) must be added back to federal income. SB 1544 provides a corresponding subtraction modification for dividends received by a corporation from a REIT (effective for tax years beginning after Dec. 31, 2008).
- Sourcing services now market-based
Illinois also changed apportionment rules for sales of services. Currently, sales of services are apportioned based on a “cost of performance”basis. Under SB 1544, a sale of services is sourced to Illinois if the purchaser is in the state or the sale is otherwise attributable to Illinois’ marketplace.
- Financial institution“lockbox rule” eliminated
Financial institutions may no longer source dividends and interest income from Illinois customers to an out-of-state lockbox. SB 1544 requires that financial institutions apportion income based on a fraction that includes a numerator of gross receipts from sources in Illinois or otherwise attributable to the Illinois marketplace.The denominator is gross receipts everywhere. SB 1544 also explains that interest income and other receipts from credit card customers are sourced to Illinois if the charges are regularly billed to an Illinois address.
- Transportation companies get new apportionment factor
Transportation companies,other than airlines, may no longer apportion business income based on a“revenue miles” factor. SB 1544 requires transportation companies to apportion business income based on a fraction that includes a numerator of:
- All receipts for movements that originate and terminate in Illinois,and
- The portion of gross receipts from interstate movements, including pass-through movements, based on miles traveled in Illinois to total miles from origination to destination.
The denominator is all revenues derived from movements of people, goods, etc.
- Net operating losses (NOL)
Taxpayers with federal NOLs reduced for indebtedness discharged through bankruptcy or insolvency must now make adjustments to Illinois loss and NOL carryovers. Taxpayers must reduce current year Illinois NOL carryovers by the portion of discharged debt attributable to Illinois.
- Withholding requirements for pass-through entities
Partnerships, S corporations, limited liability companies, trusts and other pass-through entities are required to withhold income taxes from nonresident partners,shareholders, members or beneficiaries unless they’re included on a composite tax return. SB 1544, enacted Aug. 16, 2007
Kansas
Kansas phases out corporation franchise tax
Gov. Kathleen Sebelius signed legislation to phase out the Kansas franchise tax over five years. For tax year 2007, Kansas leaves the franchise tax rate unchanged at $1.25 per $1,000 of shareholder value, but increases the Kansas taxable equity exemption from $100,000 to $1,000,000. Beginning in tax year2008, Kansas will reduce the franchise tax rate by one-quarter increments for each of the next four years. Kansas will completely repeal its franchise tax for tax year beginning after Dec. 31,2010. Senate Substitute for House Bill 2264, enacted April 19, 2007
Michigan
Michigan business tax replaces single business tax
On July 12, Gov. Jennifer Granholm signed Senate Bill 94, a comprehensive tax bill that replaces Michigan’s single business tax (SBT) with the Michigan business tax(MBT). The MBT is designed to be less reliant on profits; reward investment in capital, jobs and research and development; and eliminate the SBT’s taxation of compensation. It also includes provisions to benefit small businesses. The MBT is effective for tax years beginning on or after Jan. 1, 2008. Highlights of the MBT provisions are provided below:
The MBT, as enacted, differs from the version proposed in the governor’s budget. MBT consists of two components: a 4.95percent tax on business income and a 0.8 percent tax on “modified gross receipts.” Modified gross receipts are gross receipts less purchases from other firms, including purchases of inventory, assets, materials and supplies.
Each part of the MBT has a different filing requirement. Unlike the SBT, the tax on business income is based on net income and subject to the protection of PL 86-272. The tax on modified gross receipts is not based on net income, and taxpayers with a physical presence in Michigan for more than one day and gross receipts of $350,000 or more will have a filing requirement. SB 94 also requires unitary business groups to file combined tax returns for both MBT components.
To benefit Michigan businesses, business income and modified gross receipts are apportioned based on Michigan sales as a percentage of total sales. This is a change from the SBT’s three-factor apportionment formula. Special apportionment rules also exist for several industries, including transportation and securities.
The MBT includes changes to sourcing. Generally, the MBT sources services and intangibles to Michigan using the “market-based”method. Receipts from sales of services are sourced to Michigan in proportion to the extent received in Michigan.Receipts from sales of intangibles are sourced to Michigan prorata according to the portion used by the purchaser in Michigan. This is a change from the SBT, under which services are sourced to Michigan if a greater proportion of business activity, based on cost of performance, occurs within Michigan.
Business losses incurred after Dec. 31, 2007, can be deducted from business income. These losses can be carried forward for 10 years. For tax year 2008, businesses can also take a deduction from their modified gross receipts tax base for 65 percent of any remaining Michigan SBT business loss carry forwards incurred in tax years 2006or 2007.
- Small business provisions
In addition to retaining the SBT filing threshold of $350,000, the MBT also creates a credit to phase in tax liability for businesses with gross less than $700,000. Also, small businesses that meet limits on owner income, gross receipts and business income have a reduced rate of 1.8 percent on “adjusted business income.”
Michigan’s new tax structure includes many of the tax credits available under the SBT. Retained credits include the Michigan Economic Growth Authority, Renaissance Zone, brownfield, and historic preservation credits.Notable new credits include:
- A 0.37 percent credit based on Michigan employee compensation
- A 2.9 percent investment tax credit based on net capital assets in Michigan
- A 1.9 percent research and development credit
- A credit for 35 percent of Michigan personal property taxes levied after 2007 on industrial property
Miscellaneous
Other changes in SB 94include:
- A separate tax on financial institutions equal to 0.235 percent of average net capital over the prior five years
- An increased insurance premiums tax to 1.25 percent
SB 94, signed July 12, 2007
New York
Budget amends general combined reporting rules
As part of the state’s 2007–2008budget package, New York recently amended its combined reporting provisions. Although New York remains a separate filing state, the state determined that in certain circumstances combined reports are necessary to properly reflect the taxpayer’s activities, income, capital, or tax liability in New York.
Prior to the amendment, a corporate taxpayer had to meet three prerequisites before New York permitted or required a combined return:
- 1. A unitary relationship between related corporations
- 2. Common ownership or control
- 3. An improper reflection of the activities, income or capital of the taxpayer arising from separate filing
Also prior to the amendment,substantial inter company transactions created a presumption that filing on a separate basis did not result in a proper tax liability. Taxpayers or the Department of Taxation and Finance could rebut this presumption by demonstrating that the transactions were conducted at arm’s length prices.
Part J of the budget tax provisions eliminates the issue of whether the transactions occurred at arm’s length prices. If the unitary and common ownership tests are met and substantial inter corporate transactions exist, a taxpayer must file a combined return with the corporations with which these tests are met. If the ownership and unitary tests are met, but there are no substantial inter corporate transactions, the department retains the ability to demonstrate that a combined return is required.
To determine whethersubstantial intercorporate transactions exist, New York will consider all activities andtransactions among the related corporations. Activities and transactions thestate will consider include manufacturing, acquiring or selling goods,performing services, financing sales, incurring expenses, performing customerservices using common facilities or employees for related corporations, ortransferring assets — including accounts receivables, patents and trademarks —between related corporations. TSB-M-07(6)C, June 25, 2007
