Missouri Enacts Major Corporate Income Tax Reform Legislation, Including Changes In Rate And Apportionment

Summary

On Friday, June 1, the Missouri Governor signed several tax bills, the most important being the corporate income tax bill, S.B. 884.  The corporate income tax bill reduces the corporate income tax rate, requires single sales factor apportionment, and makes a number of other changes to Missouri’s income apportionment provisions.  A personal income tax bill, H.B. 2540, has passed the Missouri General Assembly, was delivered to the Governor, and is expected to be signed shortly.
 

Details

Missouri Corporate Income Tax Reform
S.B. 884 makes the following corporate income tax changes, including to Missouri’s long-standing (and unique, in parts) corporate income tax system:
 

• For all tax years beginning on or after January 1, 2020, the corporate income tax rate is reduced  from 6.25 percent to 4.0 percent .
• For all tax years beginning on or after January 1, 2020, corporations will be required to apportion and allocate income according a new single sales factor apportionment formula.  Missouri’s traditional, standard equally-weighted three-factor apportionment option, will no longer be available (partnerships, trusts, and individuals will still have the ability to use the three-factor formula).
• The legislation eliminates Missouri’s single sales factor election in favor of the new, required “New Single Factor” formula for all tax years beginning on or after January 1, 2020.  Specifically, corporate taxpayers must first determine whether income is “Apportionable Income” with the remainder defined by default as “Non-Apportionable Income” (similar to the Multistate Tax Commission’s Model General Allocation & Apportionment Regulations).  Non-Apportionable income is directly allocated to a state while Apportionable Income is sourced based on the Single Factor Formula.
• To use the New Single Factor formula, a corporation must be taxable in another state.  It is likely, but still uncertain, that the Department of Revenue will look to the prior law’s Multistate Tax Compact three-factor formula regulations to define “taxable in another state.”  If the Department does take that position, then a taxpayer with activities only in Missouri, or its only activities outside of Missouri are immune from income tax under P.L. 86-272, then such taxpayer would not be permitted to apportion its income.
• “Apportionable Income” is patterned after the Multistate Tax Commission’s updated model language as “all income that is apportionable under the Constitution of the United States and is not allocated under the laws of this state….”    Apportionable income includes:
  • Income arising from transactions and activity in the regular course of the corporation’s trade or business; and
  • Income arising from tangible and intangible property if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the corporation’s trade or business; and
  • Any income that would be allocable to this state under the Constitution of the United States, but that is apportioned rather than allocated pursuant to the laws of this state.
• “Non-Apportionable Income” (i.e., any income that is not “apportionable”) is sourced to Missouri (or outside Missouri, as the case may be), as follows:  
  • Net rents and royalties from real property located in the state, and capital gains from the sale of such property, is allocable to the state.
  • Net rents and royalties from tangible personal property are allocable to the state to the extent that the property is used in this state, or in their entirety if the corporation’s commercial domicile is in this state and is not organized or taxable by the state in which the property is utilized, as described in the act.
  • Capital gains from the sale of tangible personal property is allocable to this state if the property had a situs in the state at the time of sale, or if the corporation’s commercial domicile is in this state and is not organized or taxable by the state in which the property had a situs, as described in the act.
  • Interest and dividends are allocable to this state if the corporation’s commercial domicile is in this state.
  • Patent and copyright royalties are allocable to this state to the extent that the patent or copyright is utilized in this state, or to the extent that the patent or copyright is utilized in a state in which the corporation is not taxable and the corporation’s commercial domicile is in this state.
  • Capital gains and losses from sales of intangible personal property are allocable to this state if the corporation’s commercial domicile is in this state. 
• The gross receipts of Apportionable Income are sourced under rules identical to the existing market-based “Optional Single Factor” rules found in the existing Single Factor formula.
• In addition, S.B. 884 removes the requirement that an affiliated group of corporations have 50 percent or more of its income derived from sources within this state in order to file a consolidated return.  This requirement of the statute has previously been ruled unconstitutional by the Missouri Supreme Court, but had never been formally stricken from the Missouri statute.  While neither the Department nor taxpayers followed this provision in the statute, S.B. 884 now formally severs the requirement from the statutory language.  S.B. 884 also provides that transactions between affiliated members of the group are eliminated as receipts for purposes of a Missouri consolidated return.

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