The Delaware General Assembly enacted a phase-in of single-sales factor apportionment through the ‘Delaware Competes Act of 2016 (H.B. 235) as part of its goal to “incentivize job creation and investment in Delaware”. The legislature noted that continuing to employ the property and payroll factors in the apportionment formula discouraged new investments in people and property in Delaware for most Delaware businesses, H.B. 235 states.
Phase-In of Single-Sales Factor Formula
To that end, single-sales factor apportionment will be implemented over four years beginning in 2017. For tax years beginning after Dec. 31, 2016 and before Jan. 1, 2018, taxpayers must apportion income using double-weighted sales factor. For years after Dec. 31, 2017 and before Jan. 1, 2019, a triple-weighted sales factor and for tax years after Dec. 31, 2018 and before Jan. 1, 2020, a six-times weighted sales factor. For all tax years beginning after Dec. 31, 2019, a single-sales factor formula is in place.
Election for Telecommunications and Worldwide Headquarters Corporations
For tax years beginning after Dec. 31, 2016, telecommunications corporations and worldwide headquarters corporations may elect, on an annual basis, to apportion income under an equally weighted three-factor formula or the phased-in single-sales factor formula.
Telecommunications corporations are defined as corporations that are members of a group of corporate and non-corporate entities affiliated under I.R.C. § 267(b) that provide intrastate mobile telecommunications and telephone services and have aggregate annual gross receipts from such services in excess of $50 billion.
A worldwide headquarters corporation is one that records in its Form 10-Q filing that its principal executive offices are located in Delaware, employs at least 400 full-time employees within such offices, and between July 1, 2014 and June 30, 2018, contracts to make a capital investment of at least $25 million in renovations of those offices.
Adjustments to Property and Payroll Factors for Non-U.S. Corporations
For tax years beginning after Dec. 31, 2015, non-U.S. corporations must only include property located in Delaware or another U.S. state in the denominator of the property factor. Property located in a foreign jurisdiction is not included in the property factor.
For tax years beginning after Dec. 31, 2015, non-U.S. corporations must only include wages, salaries and other compensation paid to employees, apart from general executive officers that were deductible under I.R.C. § 882 in determining federal taxable income that was effectively connected (ECI) with the conduct of a trade or business in the U.S.
As the legislation notes, the effect of these provisions is to prevent non-U.S. corporations doing business in Delaware from diluting the property and payroll factors by including non-U.S. property and payroll in the denominators. This will continue to be relevant after the phase-in of the single-sales factor formula for telecommunications and worldwide headquarters corporations who, as explained above, will have the option of electing three-factor apportionment.
Other changes were made to the Delaware gross receipts tax, and to ease the compliance burden for small corporate taxpayers by adjusting estimated tax payments.
The full text of the legislation is available here:
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