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Jamie C. Yesnowitz
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On Sept. 26, 2019, New Hampshire Gov. Chris Sununu signed legislation enacting a compromise budget for the 2020-2021 fiscal biennium including several tax provisions.1
The legislation advances the Internal Revenue Code (IRC) conformity date for taxable periods beginning in 2020, imposes a triggering mechanism on previously enacted rate reductions for both the business profits tax (BPT) and business enterprise tax (BET), and adopts the use of market-based sourcing for sales other than sales of tangible personal property for periods ending on or after Dec. 31, 2021. Further, it enacts a single sales factor apportionment method for BPT for periods ending on or after Dec. 31, 2022, and subjects new services to communications tax.
Prior to amendment, for all taxable periods beginning on or after Jan. 1, 2018, the BPT adopted the IRC as in effect on Dec. 31, 2016.2
For all taxable periods beginning on or after Jan. 1, 2020, new legislation provides that the IRC as in effect on Dec. 31, 2018, is generally applicable.3
Because New Hampshire has a fixed IRC conformity date, legislation must be enacted to advance the conformity date or selectively adopt IRC amendments enacted after the conformity date. The enactment of the TCJA4
in December 2017 created a significant disparity between federal and state tax regimes, resulting in New Hampshire statutes wholly excluding the federal provisions contained in the TCJA. After adoption of the new conformity date, New Hampshire will now conform to the interest expense limitation provided under IRC Section 163(j) for tax years beginning on or after Jan. 1, 2020. While the New Hampshire legislation generally does not address specific TCJA provisions, it does establish the inclusion in the corporate tax base of 50% of global intangible low-taxed income (GILTI), which is consistent with the GILTI deduction authorized under IRC Section 250, effective for taxable periods beginning on or after Jan. 1, 2020.5
Future BPT and BET rates tied to revenue estimate
The legislation preserves, through 2020, the previously enacted rate reductions for the BPT and BET.6
As a result, the BPT rate is 7.7% and the BET rate is 0.6% for all taxable periods ending on or after Dec. 31, 2019.7
However, the new legislation repeals the previously enacted rate reductions for taxable periods ending on or after Dec. 31, 2021. Based on the newly enacted triggering mechanism, the BPT and BET rates for these taxable periods will depend on the combined amount of unrestricted general and education trust fund revenue collected for the fiscal year ending June 30, 2020 ("revenue collected"). Accordingly, for taxable periods ending on or after Dec. 31, 2021, the BPT and BET rates will remain at 7.7% and 0.6%, respectively, unless the revenue collected is at least 6% higher or lower than the official revenue estimate for the fiscal year ending June 30, 2020. If the revenue collected is at least 6% higher than the estimate, the BPT and BET rates will be reduced to 7.5% and 0.5%, respectively. In contrast, if the revenue collected is at least 6% lower than the estimate, the BPT and BET rates will be increased to 7.9% and 0.675%, respectively.8
New legislation adopts both market-based sourcing and single factor apportionment methodology for the BPT and BET in future tax periods.
Market-based sourcing is adopted for sales other than sales of tangible personal property for both the BPT and BET, effective for taxable periods ending on or after Dec. 31, 2021, and replacing historic cost of performance provisions.9
Income is sourced to New Hampshire in line with relatively new Multistate Tax Commission model apportionment provisions as follows: (i) revenue from the sale of real property, and the rental, lease or license of real or tangible personal property is sourced to New Hampshire to the extent the property is located in the state; (ii) income from the sale, rental, lease or license of intangible property is sourced to New Hampshire to the extent it is used in the state; (iii) dividend income is sourced to New Hampshire to the extent the business enterprise’s commercial domicile is in the state; (iv) interest income is sourced to New Hampshire to the extent the debtor or encumbered property is located in the state; and (v) other income is sourced to New Hampshire to the extent it is derived from sources within the state.
The statutory language allows for reasonable approximation if the state or states of assignment cannot be determined.10
Further, it includes a throw-out rule applicable when a taxpayer is not taxable in a state to which a sale is assigned, or the state of assignment cannot be determined or reasonably approximated, in which case it must be excluded from the denominator of the sales factor.11
Single sales factor
The single sales factor apportionment method is adopted for BPT purposes, effective Jan. 1, 2022, and applicable for taxable periods ending on or after Dec. 31, 2022.12
The single sales factor apportionment method will replace the three-factor apportionment method (with double-weighted sales) that is currently in place.13
The enactment of the single sales factor is subject to repeal if the New Hampshire Legislative Study Committee on Apportionment14
rescinds by majority vote its enactment in November 2020.15
Communication tax provisions
Applicable to taxable periods ending after Dec. 31, 2019, for purposes of the tax imposed on prepaid communication services, the definition of “communication services” is expanded to include prepaid wireless telecommunications services and voice-over-internet-protocol (VOIP),16
and the definitions of “retailer” and “seller” are aligned.17
Rules for sourcing income from prepaid wireless telecommunications services and VOIP for purposes of the communications tax are included.18
New Hampshire’s biennial budget was reached after a lengthy impasse between its Republican Governor and Democratic-led legislature. Reflecting a compromise, the legislative triggering mechanism which applies to provide some level of flexibility on future BPT and BET rates is intended to keep revenues at a relatively consistent level.
By finally advancing its IRC conformity date to Dec. 31, 2018, New Hampshire becomes one of the last states to move its static federal tie beyond the effective date of the TCJA. Thus, absent statutes directing otherwise, it will generally conform to the provisions of the federal law for periods beginning in 2020. Taxpayers should take note of the anticipated financial impact of this change. The decision by New Hampshire’s legislature to leave the 2018 and 2019 tax years out of conformity with the federal law is somewhat unusual from a multistate perspective, though New Hampshire has had a series of gaps in its federal conformity dates over time. While the policy to remain out of conformity from the TCJA for 2018 and 2019 will prevent retroactive tax increases to taxpayers that would otherwise be adversely affected by new domestic and international provisions intended to expand the federal tax base, the 2018 and 2019 tax years will require additional calculations to reflect pre-TCJA law.
In addition to the eventual change in the federal conformity date, taxpayers should also evaluate and determine the potential tax impact of New Hampshire’s delayed shift from a three-factor apportionment formula with double-weighted sales to a single sales factor method, as well as the shift from cost of performance to market-based sourcing of sales other than tangible personal property. The delayed implementation dates for both provisions, as well as the option for a legislative committees to rescind adoption of the single sales factor, are even more unusual than the federal conformity delay, and cast a level of uncertainty as to whether the changes relating to apportionment will occur timely, or at all.
The delayed implementation dates of the tax provisions, combined with uncertainty regarding future tax rates and apportionment method, seem to create a significant hurdle for taxpayers concerned with their impact for financial statement purposes. In particular, determining the appropriate dates of determination for each provision could prove to be a complex task.
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