New corporate tax rules

Prior to the new Business Corporation Tax Apportionment of Net Income Regulation CT 15-04, all businesses that derive income from multiple states used a three-factor apportionment formula (sales, property and payroll) to determine what amount of income to apportion to Rhode Island.

After Jan. 1, 2015, all C corporations and combined groups that have income generated in Rhode Island and other states are required to use single-sales factor to apportion net income in Rhode Island.

To calculate the combined group’s sales factor, which is now required, (as discussed last week in the first installment of this two-part column), C corporations should use the Finnigan Method. Therefore, all receipts that pertain to Rhode Island are considered as part of the calculation, regardless of whether the particular member of the group has nexus in Rhode Island.

The single-sales factor apportionment also comes with a rule for throwback sales; Rhode Island becomes the default state for the receipts if products are shipped from Rhode Island to a state that does not levy an income tax.

- Advertisement -

Regulated investment companies and securities brokerage services will determine their share of net income attributable to Rhode Island, using the same method they did under pre-CT 15-04 guidance.

Historically, it can be challenging to apportion income from sales other than that of tangible property. To address this, Rhode Island is adopting market-based sourcing rules. Determining whether sales for anything other than tangible property have a market within Rhode Island requires taxpayers to follow a sequential hierarchy of rules.

In some examples, this requires the taxpayer to first determine or approximate where the good or service is received. For services, corporations will apportion receipts to the state where the recipient received the benefit of the service. Services provided by an in-person service provider will be sourced to the location that service was rendered. Businesses should source services delivered electronically to individuals to where the individual received it (i.e., if it was through the Internet, where that individual receives Internet services). If electronically delivered to a business, corporations should use the location of the business. Professional services, generally those services rendered by licensed individuals (CPAs, medical, etc.) are sourced to where the service was provided. For recipients of intangible property that receive only partial benefits within Rhode Island, the corporation should include the receipts from the transaction in the numerator of the apportionment factor, to the extent the recipient receives the benefit of the service in Rhode Island.

Should a corporation find its sales for items other than tangible property have a market within Rhode Island, then it must follow the single-sales-factor apportionment rules described in CT 15-04.

Unlike Massachusetts, which allows a “throw-out” rule for sales where the apportionment cannot be reasonably determined, Rhode Island elected not to include such a provision. Instead, organizations will have to consider the customer’s billing address or other approximations of where the client received the benefit when sourcing income.

If you conduct any level of business within Rhode Island, consider the recent changes to corporate tax carefully, as the new guidance may affect your 2015 state reporting requirements. •

Tarra Curran is a managing director in the tax group and leader of the New England state and local tax practice at CBIZ Tofias. She can be reached at TCurran@cbiztofias.com.

No posts to display