Impact of 2015 State Tax Law Changes for Corporate TaxpayersNovember 09, 2015
Recent state tax legislation changes the rules regarding market based sourcing, factor nexus, and more.
As year-end quickly approaches, corporate tax departments will soon be focused on fourth quarter estimated tax payments and 2015 tax provision calculations. A great deal of state tax legislation was adopted in both 2014 and 2015, with an effective date of tax years beginning on or after January 1, 2015. These changes will be important to consider as calculations are made of 2015 tax liabilities. Some of the more significant changes are reviewed below:
1. Factor Nexus – A taxpayer cannot be subject to a state income tax unless they have substantial physical presence in the state, or nexus.
- A recent trend within the states is to define substantial physical presence as exceeding a certain minimum threshold of sales in their state.
- Corporate tax departments need to carefully monitor these requirements and the impact they have on their state tax filing obligations.
- New York State ($1M) and Alabama ($500K) have adopted such filing thresholds for 2015.
- Other recently adopted factor nexus thresholds beginning in 2016 can be found in Tennessee ($500M) and Washington State ($267K).
- In total, seven states have now adopted factor nexus standards.
2. Unitary Tax Filings – States that adopt the unitary tax method:
- Require legal entities that are commonly owned and engaged in related business activities to file a tax return as if they were a single legal entity. Whether this filing methodology increases or decreases a taxpayer’s state tax burden is dependent on the specific facts and circumstances.
- New York State, New York City and Rhode Island have all adopted unitary taxation for 2015. Connecticut has adopted unitary taxation for tax years beginning January 1, 2016.
3. Market Based Sourcing – Historically, receipts from the performance of services and the licensing of intangibles were sourced for sales factor apportionment purposes based on where the costs were incurred to generate the receipts. Market based sourcing:
- Looks instead to where the benefit of the service or intangible is received or delivered. In effect, the location of the customer will in most cases determine where receipts are sourced.
- Has been adopted by Rhode Island, the District of Columbia, and both New York State and New York City, for corporate taxpayers for 2015.
- Is required for receipts from services by nineteen states as of now.
As the new year approaches, corporate tax departments need to carefully evaluate what effect state legislative changes will have on the state tax liability and filing obligations for 2015 and future years.
Read more about year-end tax planning in our recent blogs:
“Top 5 Year End Tax Planning Tips for Small Business Owners”
“2015 Year-End Tax Planning Tips for Individuals”
“7 Smart Strategies for Year End Tax Planning”
Questions? Contact any member of our Tax Services Team.