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Jamie C. Yesnowitz
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Over the past two months, the state of Missouri enacted three bills making substantial modifications to both its corporate income tax regime1
and personal income tax provisions.2
Specifically, the legislation reduces income tax rates for both individuals and corporations, modifies or repeals certain personal income tax deductions and exemptions, modifies consolidated return requirements and replaces the numerous apportionment methods for corporations with mandatory single sales factor apportionment. Effective dates for these provisions vary as specified below, and in certain instances could result in some flexibility for taxpayers preparing their 2017 corporate returns.
Corporate income tax
Tax rate decreased
For taxable years beginning in 2020 and thereafter, Missouri’s corporate income tax rate is decreased to 4%.3
Previously, the tax rate was 6.25%.4
To offset lost revenue from a reduced tax rate, Missouri lawmakers repealed the three-factor apportionment option previously available to taxpayers under the model terms of the Multistate Tax Compact pursuant to statute.5
For tax years ending before 2020, Missouri taxpayers may elect to use either a three-factor apportionment method, a business-transacted single-sales factor formula, or an elective single sales factor method.6
For tax years beginning in 2020 and thereafter, all taxpayers will be required to use the single sales factor method of apportionment.7
The legislation also changes how corporations determine income derived from sources within Missouri. For tax years ending before 2020, taxpayers using the business-transacted single-sales factor apportionment formula are required to bifurcate Missouri sales between transactions wholly within and partially within the state.8
Taxpayers electing the optional single sales factor apportionment method use the purchaser’s destination point to source sales of tangible personal property and market-based sourcing rules to source all other sales.9
For tax years beginning in 2020 and thereafter, simplified sourcing rules apply for all taxpayers. Specifically, sales of tangible personal property are sourced based on where the purchaser ultimately receives the property, and sales other than sales of tangible personal property are sourced based on the taxpayer’s market.10
The Director of Revenue is directed to promulgate rules for certain industries where unusual facts and circumstances produce unfair results under the legislative provisions.11
This language appears similar to wording included by the Multistate Tax Commission (MTC) in its Model General Allocation and Apportionment Regulations (model regulations). 12
Specifically, the Director may require separate accounting, the inclusion of one or more additional factors, or the employment of any other method to effectuate an equitable allocation and apportionment of the corporation’s income.13
The burden of proving that the normal provisions produce unfair results lies with the party seeking to use an alternative method.
New law delineates certain items of income that are allocable to Missouri, to the extent they are not constitutionally apportionable as transactions and activity in the regular course of a corporation’s business.14
This language conforms to amendments adopted on Feb. 24, 2017, to the MTC’s model regulations,15
which included the adoption of market-based sourcing for receipts from transactions other than sales of tangible personal property. With those changes, the MTC amended language to change definitional terms for “business income” and “sales.” “Business income”16
is now referred to as “apportionable income” 17
and the new definition of the term reflects an explicit reference to the Constitution as the standard for determining what income is subject to formulary apportionment.
Specifically, rents and royalties from real or tangible personal property, capital gains, interest, dividends, and patent or copyright royalties may be allocable income in Missouri. 18
Net rents, royalties, and capital gains from property are generally allocated to Missouri to the extent related tangible or intangible property is located or utilized in the state.19
Items such as interest and dividends are generally allocated based on the corporation’s commercial domicile.20
Consolidated return requirements
Effective for tax returns filed on or after Aug. 28, 2018, the legislation makes several changes to consolidated return requirements for corporate taxpayers. First, it repeals the previously existing requirement that an affiliated group of corporations have 50% or more of its income derived from sources within the state in order to file a consolidated return.21
Also, affiliated groups filing a consolidated return are required to eliminate transactions between members of the group under the revised statute.22
Previously, taxpayers filing a Missouri consolidated return were not able to eliminate transactions between affiliates, even if such transactions were eliminated on the federal consolidated return. Finally, new law specifies that intercompany transactions (as defined under the federal consolidated regulations) between corporations filing a Missouri consolidated return are not considered sales. Thus, they are excluded from both the apportionment calculation and the computation of Missouri taxable income.23
Personal income tax
Tax rate decreased
Under prior law, the highest personal income tax rate of 5.9% (previously, 6.0%) was scheduled to decrease by 0.1% annually beginning with the 2017 calendar year, provided the state reached annual revenue collection targets.24
With the new legislative provisions, the top individual income tax rate is reduced to 5.4% for taxable income over $8,000 beginning Jan. 1, 2019.25
The previously scheduled 0.1% annual decreases to the top rate remain in effect and will occur in years in which the state’s revenue collections exceed a target amount.26
If the target is met, the following calendar year’s top tax rate will be reduced by 0.1% until the top rate reaches 5.1%.27
Deductions and exemptions
Beginning in 2017, a pass-through income deduction amount became available to individuals, equal to 5% of an individual’s business income, to the extent that the business income amount is included in federal adjusted gross income when determining the individual’s Missouri adjusted gross income.28
Provided specified thresholds for general revenue collection are met, the deduction was set to increase by 5% annually until it reached 25%.29
The new legislation, however, caps the deduction at 20%.30
The state’s deduction appears similar to the pass-through deduction enacted for federal purposes under H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA).31
To coincide with other deductions allowed under TCJA, Missouri eliminated the personal exemptions for taxpayers and dependents as long as the federal exemption amount is zero.32
With this provision, Missouri effectively conforms to the elimination of the personal exemption under the TCJA.
Furthermore, the state’s individual deduction for federal income taxes paid is subject to a phaseout based on federal taxable income. The maximum deduction for individuals filing separately is $5,000 in federal tax liability and increases to $10,000 for taxpayers who are married filing jointly.33
Starting Jan. 1, 2019, taxpayers with federal taxable income over $125,000 will not be eligible for this deduction.34
The tax reform legislation was developed and ultimately enacted in what became an unusually turbulent year in Missouri politics. In January 2018, Missouri Gov. Eric Greitens presented his own tax reform plan and urged lawmakers to prioritize tax reform during the 2018 legislative session. As a result, several tax reform bills were passed during the state’s regular legislative session. Shortly thereafter, Greitens resigned as governor due to hardships stemming from criminal investigations and the possibility of impeachment. However, on his last day in office, Greitens signed the corporate tax reform bill, along with 76 other bills. Gov. Mike Parson, Greitens’ replacement who had supported the corporate tax reform bill provisions, signed the individual tax reform bill into law.
Although S.B. 884 does not directly address most of the TCJA provisions enacted in late 2017, H.B. 2540 represents Missouri’s response to individual federal tax reform. By its relative silence on the issue and its current conformity to the Internal Revenue Code (IRC) in computing corporate taxable income, without further action, Missouri will conform to several significant federal provisions which were enacted or changed with the TCJA, including IRC Sec. 163(j) (federal interest limitation), Sec. 168(k) (bonus depreciation), and Sec. 179 (expensing).
S.B. 884 is intended to increase Missouri’s competitiveness for multistate businesses, simplify the tax system, and provide the state with greater potential for economic growth. With the new tax rate of 4 percent, Missouri is among the states with the lowest corporate income tax rates, thus putting the state at a perceived competitive advantage to attract multistate businesses. Time will tell whether these reforms provide the state with future economic growth.
A potential compliance issue arising from the legislation is relevant for taxpayers subject to corporate income tax. Specifically, calendar year taxpayers that have extended their 2017 Missouri corporate income tax returns (as well as certain fiscal year taxpayers) may need to consider whether to expedite their next filings to a date before Aug. 28, 2018, the effective date of the consolidated return provisions. It appears that corporations filing prior to that date would be subject to the rules in effect prior to the enacted legislation. Thus, they would include transactions between affiliates in their calculations of taxable income and apportionment factors. Those filing on and after that date would be subject to the new provisions which generally eliminate intercompany transactions. This dichotomy should result in interesting filing options, as well as a potential rush to complete returns that would otherwise be due later this fall.
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