District of Columbia Archives | Page 3 of 4

Is 2015 the Beginning of Mandatory Single Sales Factor Apportionment for D.C. Taxpayers?

by Diann Smith and Stephen P. Kranz | Aug 13, 2014 | Allocation/Apportionment, Constitutional Issues, District of Columbia, Income Tax, Local Tax, UDITPA

On July 14, 2014, the Fiscal Year 2015 Budget Support Emergency Act of 2014 (2015 BSEA) was enacted after the D.C. Council voted to override Mayor Vincent Gray’s veto. The act includes a tax relief package recommended by the D.C. Tax Revision Commission, and includes a change to D.C.’s apportionment formula, moving the city to single sales factor apportionment.

Since January 1, 2011, D.C. has required taxpayers to apportion their business income by the property-payroll double-weighted sales factor formula. D.C. Code Ann. § 47-1810.02(d-1). Among the provisions enacted in the 2015 BSEA, the District will require the apportionment of business income via a single sales factor formula, starting with tax years beginning after December 31, 2014. D.C. Act 20-0377, § 7012(c)(10) (2014). While the 2015 BSEA has only a temporary effect and expires on October 12, 2014, it serves as a stopgap until the process of enacting the permanent version, the Fiscal Year 2015 Budget Support Act of 2014 (2015 BSA) is completed. (See the single sales factor apportionment provision at D.C. Bill 20-0750, § 7012(a)(10) (2014).) The 2015 BSA has not yet been enrolled and transmitted to the mayor. After the mayor signs the 2015 BSA or the D.C. Council overrides his veto, the 2015 BSA will be sent to Congress for review. If Congress and the President do not enact a joint resolution disapproving of the 2015 BSA, the 2015 BSA will become law, and the switch to single sales factor apportionment will be effective as of January 1, 2015.

Even with this legislative change, D.C. taxpayers may have an argument for apportioning their business income under the three-factor apportionment formula. In 1981, the District adopted the Multistate Tax Compact (Compact) as 1981 D.C. Law 4-17. The Compact provides for the use of the evenly weighted three-factor sales-property-payroll formula. Multistate Tax Compact, art. IV, sec. 9. The Compact permits the taxpayer to elect to apportion his business income under the city’s apportionment formula or under the Compact’s three-factor formula. Multistate Tax Compact, art. III, sec. 1. In 2013, D.C. repealed and reenacted the statute codifying the Compact, D.C. Code § 47-441. However, D.C. did not re-enact Article III, Elements of Income Tax Laws, and Article IV, Division of Income. The repeal of the two articles was effective as of July 30, 2013. D.C. Act 20-130, §§ 7342(a), (b) (2013); D.C. Act 20-204, §§ 7342(a), (b) (2013); D.C. Law 20-61, §§ 7342(a), (b) (2013).

D.C. repealed and reenacted the Compact in reaction to litigation involving taxpayers that elected to use the three-factor apportionment formula under the Compact instead of the state-mandated apportionment formulas. See Gillette Co. et al. v. Franchise Tax Bd., 209 Cal.App. 4th 938 (2012); Int’l Bus. Mach. Corp. v. Dep’t of Treasury, No. 146440 (Mich. Jul. 14, 2014); Health Net, Inc. v. Dep’t of Revenue, No. TC 5127 (Or. T.C. 2014). The California Court of Appeal and Michigan Supreme Court have upheld the taxpayers’ use of the Compact election.

Following the theories being advanced in [...]

Continue Reading

2015 D.C. Budget Bill Includes Several Significant Business Tax Changes

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 21, 2014 | Allocation/Apportionment, District of Columbia, Income Tax, UDITPA

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 [...]

Continue Reading

Alenia Decision May Benefit D.C. Corporate Taxpayers

by Diann Smith and Stephen P. Kranz | May 13, 2014 | Allocation/Apportionment, Constitutional Issues, District of Columbia, Income Tax, Tax Base

The recent decision in Alenia N. America, Inc. v. District of Columbia Office of Tax and Revenue in the District of Columbia Office of Administrative Hearings (OAH) could present opportunities for District taxpayers to receive corporate franchise tax refunds by including their joint ventures’ apportionment factors in the taxpayers’ District apportionment percentage calculation. Alenia N. America v. District of Columbia Office of Tax and Revenue, Dkt. 2012-OTR-00015 (D.C. O.A.H. Mar. 11, 2014).

Through an unwritten, internal policy, the District of Columbia Office of Tax and Revenue (OTR) prohibited separate filers from including the apportionment factors of joint ventures in which a taxpayer was a member/partner in the apportionment percentage calculation while permitting consolidated filers to do so. Alenia N. America challenged this interpretation of the District’s apportionment formula, filing a protest in OAH. Alenia is a separate filer C Corporation headquartered in the District. A portion of Alenia’s 2010 tax year income resulted from its 51 percent ownership in a Mississippi LLC, Global Military Aircraft Systems (GMAS). Because OTR required Alenia to include the income resulting from ownership of GMAS in its apportionable tax base but exclude the apportionment factors of GMAS, Alenia’s District apportionment percentage increased from 55.1899 percent to 86.1993 percent. OTR effectively asserted the power of taxation over income derived from sources outside of the District.

OAH granted a summary decision in favor of Alenia, holding that GMAS’ apportionment factors could be included by Alenia because Alenia and GMAS were unitary and the District’s apportionment statute was designed with the purpose to create uniformity; most states applying formulaic apportionment allow for the inclusion of the apportionment factors (see Homart Development Co. v. Norberg, 529 A.2d 115 (R.I. 1987); Malpass v. Dep’t of Treasury, 494 Mich. 237, 833 N.W.2d 272 (2013)); and factor inclusion was necessary to reflect the source of the GMAS income. Reading the District’s apportionment statute, D.C. Code § 47-1810.02, “consistently with its constitutional underpinnings and its general purpose to promote uniformity” overcame the silence as to whether the inclusion of factors applied to separate filers. OTR’s misinterpretation of District law was “in conflict with the statute.” Alenia, Dkt. 2012-OTR-00015 at *26.

In light of the holding in Alenia allowing for the inclusion of the apportionment factors of joint ventures, taxpayers should consider whether District refunds are now available to them. Further, an argument can be made that the holding in Alenia continues to apply despite the District’s switch to a combined reporting regime because of the court’s insistence that factor inclusion is necessary to reflect the source of the taxpayer’s income.

For a copy of the decision, contact one of the authors.