State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Montana Enacts Legislation Adopting Market-Based Sourcing On May 3, 2017, Montana enacted legislation revising its Multistate Tax Compact (Compact) provisions, as recommended by the Multistate Tax Commission (MTC), to adopt market-based sourcing for sales other than sales of tangible property, change definitional terms for business income and sales, and expand alternative apportionment provisions. 1 The legislation takes effect January 1, 2018 and applies to tax years beginning after December 31, 2017. Background In 1957, the Uniform Law Commission promulgated the Uniform Division of Income for Tax Purposes Act (UDITPA) to provide uniform laws that states could adopt to assign the taxable income of multistate corporations among the states in which they do business. In 1967, the MTC created the Compact and included the UDITPA provisions in Article IV. In 2014 and 2015, the MTC revised Article IV of the Compact to, among other things, adopt market-based sourcing for receipts from transactions other than sales of tangible personal property. 2 With the adoption of this legislation, Montana revises its Compact provisions to conform to many of the MTC revisions. Article IV, Section 1 Definitional Changes The MTC amended Article IV, Section 1 of the Compact to change definitional terms for business income and sales. The Montana legislation adopts these revisions. Under Article IV, Section 1, the definitional term business income has been replaced with apportionable income. 3 Apportionable income is defined as all income that is apportionable under the U.S. Constitution and is not allocated under the laws of Montana, 4 including: (A) income arising from transactions and activity in the regular course of the taxpayer s trade or business; 5 and (B) 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 taxpayer s trade or business. 6 The definition of apportionable income also includes any income that would be Release date May 23, 2017 States Montana Issue/Topic Corporate Income Tax Contact details Nisha Mathew Seattle T 206.398.2445 E nisha.mathew@us.gt.com Jamie C. Yesnowitz Washington, DC T 202.521.1504 E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T 312.602.8517 E chuck.jones@us.gt.com Lori Stolly Cincinnati T 513.345.4540 E lori.stolly@us.gt.com Priya D. Nair Washington, DC T 202.521.1546 E priya.nair@us.gt.com www.grantthornton.com/salt 1 H.B. 511, Laws 2017. 2 Model General Allocation and Apportionment Regulations, Prefatory Notes. For further discussion of the amendments to the Compact, see GT SALT Alert: Multistate Tax Commission Finalizes Compact Provision Amendments. 3 MONT. CODE ANN. 15-1-601, ART. IV, (1)(a). 4 MONT. CODE ANN. 15-1-601, ART. IV, (1)(a)(i). 5 MONT. CODE ANN. 15-1-601, ART. IV, (1)(a)(i)(A). 6 MONT. CODE ANN. 15-1-601, ART. IV, (1)(a)(i)(B)..
Grant Thornton LLP - 2 allocable to Montana under the U.S. Constitution but that is apportioned rather than allocated under the laws of Montana. 7 Similarly, the definitional term nonbusiness income has been replaced with nonapportionable income which is defined as all income other than apportionable income. 8 The term sales has been replaced with the term receipts, which is defined as all gross receipts of the taxpayer that are not allocated under Article IV and that are received from transactions and activity in the regular course of the taxpayer s trade or business. 9 However, receipts of a taxpayer from hedging transactions and from the maturity, redemption, sale, exchange, loan or other disposition of cash or securities are excluded. 10 Amendments were made throughout the statute to reflect these new terminologies and definitional changes. Sourcing of Receipts from Sales of Other than Tangible Personal Property Applicable to tax years beginning after December 31, 2017, Montana adopts a marketbased sourcing method for sourcing sales other than sales of tangible personal property. Specifically, receipts from sales of other than tangible property will be considered Montana receipts if the taxpayer s market for the sales is in Montana. 11 A taxpayer s market for sales is in Montana: 12 For the sale, rental, lease or license of real property, to the extent the property is located in Montana; 13 For the rental, lease or license of tangible personal property, to the extent the property is located in Montana; 14 For the sale of a service, to the extent the service is delivered to a location in Montana; 15 For the rental, lease or license of intangible property, to the extent it is used in Montana; 16 and For the sale of certain intangible property, to the extent the property is used in Montana. 17 It should be noted that only certain receipts from the sale of intangible property are included in the receipts factor calculation. A contract right, government license, or similar intangible property authorizing the holder to conduct a business activity in a specific geographic area is used in this state if the geographic area includes all or part of 7 MONT. CODE ANN. 15-1-601, ART. IV, (1)(a)(ii). 8 MONT. CODE ANN. 15-1-601, ART. IV, (1)(e). 9 MONT. CODE ANN. 15-1-601, ART. IV, (1)(g). 10 Id. 11 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a). 12 Id. 13 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(i). 14 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(ii). 15 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(iii). 16 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(iv)(A). [I]ntangible property utilized in marketing a good or service to a consumer is used in this state if that good or service is purchased by a consumer who is in this state. 17 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(iv)(B).
Grant Thornton LLP - 3 Montana. 18 Receipts from intangible property sales that are contingent on the productivity, use, or disposition of the intangible property are treated as receipts from the rental, lease, or licensing of such intangible property. 19 All other receipts from sales of intangible property are excluded from the receipts factor calculation. 20 Reasonable Approximation and Throwout Rule For purposes of sourcing receipts from sales other than sales of tangible personal property, the legislation allows for reasonable approximation if the state of assignment cannot be determined. 21 In addition, a throwout rule may apply under which receipts will be excluded from the denominator of the receipts factor if the taxpayer is not taxable in the state where a receipt is assigned under the above sourcing rules, or if the state of assignment cannot be determined or reasonably approximated. 22 Alternative Apportionment The legislation gives the tax administrator the authority to promulgate regulations for alternative apportionment if the standard allocation and apportionment rules do not fairly represent the extent of business activity in Montana of taxpayers engaged in a particular industry or in a particular transaction or activity. 23 This authority is in addition to its statutory powers to impose alternative apportionment on a taxpayer. 24 Any such regulation promulgated must be applied uniformly but the taxpayer may petition for, or the tax administrator may require, the use of Montana s alternative apportionment provision. 25 The party utilizing alternative apportionment must prove by a preponderance of the evidence: (A) that the allocation and apportionment provisions under Article IV do not fairly represent the extent of the taxpayer s business activity in Montana; and (B) that the alternative apportionment is reasonable. 26 The same burden of proof applies whether the taxpayer or the tax administrator is utilizing alternative apportionment. 27 However, if the tax administrator can show that in any two of the prior five tax years, the taxpayer had used an allocation or apportionment method that varied from the allocation or apportionment methods used for the other tax years, then the tax administrator will not bear the burden of proof when imposing a different method. 28 Further, if the tax administrator requires alternative apportionment in a situation where the taxpayer had relied on statutory allocation and apportionment, the tax administrator cannot impose a 18 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(iv)(B)(I). 19 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(iv)(B)(II). 20 MONT. CODE ANN. 15-1-601, ART. IV, (17)(a)(iv)(B)(III). 21 MONT. CODE ANN. 15-1-601, ART. IV, (17)(b). 22 MONT. CODE ANN. 15-1-601, ART. IV, (17)(c). 23 MONT. CODE ANN. 15-1-601, ART. IV, (18)(b)(i). 24 Id. MONT. CODE ANN. 15-1-601, ART. IV, (18)(a) provides that if the allocation and apportionment provisions do not fairly represent the extent of the taxpayer s business activity in Montana, the taxpayer may petition for or the tax administrator may require, with respect to all or any part of the taxpayer s business activity, if reasonable: (i) separate accounting; (ii) the exclusion of one or more factors; (iii) the inclusion of one or more additional factors that would fairly represent the taxpayer s business activity in Montana; or (iv) the employment of any other method that would effectuate an equitable solution and apportionment of the taxpayer s income. 25 MONT. CODE ANN. 15-1-601, ART. IV, (18)(b)(ii). 26 MONT. CODE ANN. 15-1-601, ART. IV, (18)(c)(i). 27 MONT. CODE ANN. 15-1-601, ART. IV, (18)(c)(ii). 28 Id.
Grant Thornton LLP - 4 penalty on the taxpayer. 29 Finally, a taxpayer that has received written permission from the tax administrator to use alternative apportionment cannot have that permission revoked with respect to transactions and activities that already occurred unless there has been a material change in the taxpayer s facts, or a material misrepresentation of such facts upon which the tax administrator relied. 30 Pass-Through Entities The legislation also provides that a partnership or S corporation with business activity occurring both within and outside Montana must use the allocation and apportionment provisions contained in the state s corporate income tax provisions. 31 The same also holds true for disregarded entities not owned by an individual, estate or trust. 32 Commentary Montana s adoption of most of the MTC s recommended changes to Article IV of the Compact is a positive step for the MTC s goal of state tax uniformity. However, it also highlights two problems inherent in the uniformity process the significant amount of time it takes to achieve uniformity, and the difficulty in getting to complete conformity. Most of the substantive amendments to Article IV of the Compact were approved by the MTC in July 2014. It has taken nearly three years for Montana to adopt the MTC s recommendations. In addition, Montana did not follow the MTC s recommendation in the revised Compact to move to a three-factor apportionment formula consisting of property, payroll and a double-weighted sales factor. Instead, Montana kept the historic Compact formula consisting of equally-weighted property, payroll and sales factors. 33 Furthermore, the adoption of the changes to the underlying statute only marks the first step. Montana will also need to promulgate regulations consistent with its statute and the MTC s model regulations. The MTC adopted amendments to its Model General Allocation and Apportionment Regulations on February 24, 2017 to reflect the changes made to Article IV of the Compact. The adoption process took almost three years and began on July 31, 2014 when the MTC s Executive Committee requested the Uniformity Committee to draft regulations to implement recommended Article IV changes. The bulk of the model regulations were comprised of highly detailed, and highly complex, sourcing rules for receipts from transactions other than sales of tangible personal property. Given the lack of specificity in Montana s newly adopted sourcing provisions, it remains to be seen when and how Montana will address the promulgation of rules that will flesh out the details of the sourcing provisions. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific 29 MONT. CODE ANN. 15-1-601, ART. IV, (18)(d). 30 MONT. CODE ANN. 15-1-601, ART. IV, (18)(e). 31 MONT. CODE ANN. 15-30-3302(6)(a). 32 MONT. CODE ANN. 15-30-3302(6)(b). 33 MONT. CODE ANN. 15-1-601, ART. IV, (9).
Grant Thornton LLP - 5 circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.