Corporate Close-Up: Apportionment Roundup—New Industry Specific Formulas and Sourcing Rules for Oregon, Tennessee, and Virginia

While the main focus of the states’ regular legislative sessions has been responses to federal tax reform, many states are using the session as an opportunity to do a bit of spring cleaning in other areas as well. Several states have recently passed bills affecting apportionment for specific industries, including special formulas and special sourcing rules.

Oregon Extends Interstate Broadcaster Sourcing Rules

In Oregon, Gov. Kate Brown (D) signed H.B. 1523, which extends the domicile-based sourcing rules for interstate broadcasters through tax year 2018. Since 2014, interstate broadcasters have been required to source receipts based on the ratio that the broadcaster’s customers in Oregon bears to the broadcaster’s customers everywhere.

As the Oregon legislature explained in its research report prior to enacting H.B. 1523, despite enacting the domicile sourcing rules at the behest of the broadcasting industry, Oregon is involved in extended litigation over the very definition of “broadcaster.” By extending the current sourcing method and definitions, the legislature will have more time to evaluate the economic impact of the move from the audience method to the domicile method and, potentially, allow for the resolution of current litigation.

Tennessee Election for Financial Management Partnerships

In Tennessee, Gov. Bill Haslam (R) signed S.B. 2256 on April 9, 2018, providing a new apportionment option for financial asset management companies, beginning Jan. 1, 2018. Under the new bill, a publicly traded partnership that derives at least 90 percent of its gross receipts from management of financial assets (not including real estate investment trusts) may elect to apportion income using a single-sales factor formula. Net worth is multiplied by a fraction, with the total receipts in Tennessee as the numerator, and the denominator being total receipts everywhere.

Virginia Single-Sales Factor Apportionment for Debt Buyers and Apportionment Incentives for Economic Investment

Virginia taxpayers get double the fun, with Gov. Ralph Northam (D) signing both H.B. 798 and H.B. 222 on April 9, 2018. The first bill requires debt buyers to use a single-sales factor apportionment formula for taxable years beginning on and after Jan. 1, 2019, and provides that sales are sourced to Virginia if money is collected on a debt from an individual who is a Virginia resident or an entity whose commercial domicile is in Virginia.

In an effort to encourage out-of-state businesses to open up shop in Virginia, the second bill provides a subtraction from the numerator of the apportionment formula for any taxpayer who is an “eligible company” under the bill. An eligible company is any traded-sector corporation or pass-through entity that does not have property or payroll in Virginia as of Jan. 1, 2018, is certified as generating a positive monetary effect by the Virginia Economic Development Partnership Authority, and either: (1) spends $5 million or more on new capital investment in qualified localities, creating at least 10 new jobs in those localities, or (2) creates 50 or more new jobs in qualified localities.

The subtraction modification allows eligible companies to deduct from the numerator the value of: (1) property acquired in a qualified locality on or after Jan. 1, 2018, but before Jan. 1, 2025; (2) payroll from jobs created in any qualified locality on or after Jan. 1, 2018, but before Jan. 1, 2025; and (3) sales made in Virginia during the taxable year.

In the midst of the flurry of activity surrounding states’ attempts to address the impact of federal tax reform, it’s easy for smaller bills to slip through the cracks in a taxpayer’s mind. Taxpayers and tax practitioners should be mindful of other changes that may come about from this year’s regular legislative sessions, as states continuously look for ways to generate revenue and provide attractive incentives to out-of-state businesses.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What changes are coming out of your state’s 2018 regular legislative session outside of responses to federal tax reform?

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