The FY 2015 District of Columbia Budget Request Act (BRA, Bill 20-749) is currently being reviewed by the D.C. Council after being introduced on April 3 at the request of Mayor Vincent Gray. This year’s Budget Support Act (BSA, Bill 20-750), the supplementary bill implementing changes based on the BRA, contains several significant modifications to the tax provisions of the D.C. Code. The changes include provisions recently recommended by the D.C. Tax Revision Commission (TRC), an independent body created by the Council to evaluate possible changes to tax policy in the District with a focus on broadening the tax base and providing “fairness in tax apportionment.” In particular, the BSA proposes to adopt a single sales factor formula for the apportionment of business income and to reduce business income tax rates (both corporate and unincorporated) from nearly 10 to 9.4 percent. Two additional amendments are pulled directly from the Multistate Tax Commission (MTC) rewrite of the Uniform Division of Income for Tax Purposes Act (UDITPA), including a change to the District’s definition of “sale” and the elimination of cost-of-performance sourcing.
Under the District’s existing apportionment statute, all businesses must apportion business income using a four factor formula consisting of property, payroll and double weighted sales factors. If the BSA is enacted, the statute would be amended to also apportion all business income using a single sales factor. While it is clear that the intent of the BSA provision is to adopt a single sales factor in D.C. going forward, a major ambiguity exists in drafting that would require apportionment using both a single sales and double weighted sales factor formula for taxable years starting after December 31, 2014—which of course is impossible. Thus, without a legislative amendments by the D.C. Council prior to passage on May 28, it is unclear whether the single sales factor formula will be optional or mandatory (as recommended by the TRC) for FY 2015. The budget projection released by Mayor Gray in conjunction with the legislation suggests that the single sales factor would be mandatory, since it is projected that this change would raise an additional $20 million in tax revenue for the District for FY 2015. If the single sales factor were optional, it is unlikely the provision would raise that much revenue.
In addition to statutory modifications to the apportionment formula, the BSA also would reduce the tax rate imposed on corporate and unincorporated businesses from 9.975 percent to 9.4 percent. This is still higher than Maryland (8.25 percent) and Virginia (6 percent).
Picking up where the MTC left off with its ongoing UDITPA rewrite, the District would adopt the MTC draft definition of “sale” to explicitly exclude receipts from hedging transactions and other investment related activity (including the sale, exchange or other disposition of cash or securities).
In addition, BSA would adopt market-based sourcing for sales of intangibles and services, using the language of the MTC draft to do so. The BSA does not pick up the remaining provisions of the MTC draft UDITPA rewrite.
The full text of the BSA is available here.
Practice Note: Since the vast majority of large multistate businesses making sales in the District do not have significant property or payroll in D.C., most corporations will likely be subject to greater tax liability under a single sales factor approach. The expected legislative timetable for adoption of the BSA is below:
FY 2015 Budget Timeline:
- April 3, 2014: Mayor Gray submits FY 2015 Proposed Budget to D.C. Council
- April 7, 2014: Committee of the Whole Briefing on Mayor’s proposed budget
- May 9, 2014: Committee of the Whole Public Hearing on BRA and BSA
- May 13-15, 2014: Council Committee Mark-Ups
- May 19-27, 2014: Council closed door markup and negotiation
- May 28, 2014: Council will conduct its first reading and vote on the BRA and BSA (only one reading of the BRA is required since it must be sent to Congress for approval under the D.C. Home Rule Act)
- June 11, 2014: Council second vote on the BSA. Shortly after both the BRA and BSA are approved by the Council, they will be submitted to Congress for approval. Congress approves the D.C. Budget in conjunction with their federal appropriations legislation (which may take months)
- October 2014: Fiscal Year 2015 begins