New state tax legislation in Missouri will have a significant effect on businesses and individuals in the coming years.
On July 12, 2018, Missouri Governor Mike Parson signed legislation (H.B. 2540) that will reduce Missouri’s top individual income tax rate to 5.4 percent in 2019.
On June 1, 2018, Missouri also enacted legislation (S.B. 884) that will bring significant changes to business taxation starting with the 2020 tax year. This law will reduce Missouri’s tax rate for C corporations, mandate the use of single-receipts factor apportionment for all business taxpayers, and require market-based sourcing for revenue from sales of items other than of tangible personal property.
Additionally, effective August 28, 2018, S.B. 884 will require the elimination of transactions between affiliated group members who are included in the same Missouri consolidated income tax return. The law also eliminates the long-overruled requirement that an affiliate group must derive at least 50 percent of its income from in-state sources in order to file a consolidated return.
Individual income tax rate drops to 5.4 percent
Beginning with the calendar 2019 tax year, Missouri’s top individual income tax rate will drop from 5.8 percent to 5.4 percent. This rate will continue to drop incrementally to 5.1 percent if the state meets certain annual revenue targets.
Even though Missouri estimates that these tax rate cuts will decrease general revenue by $5.8 million, the Missouri Budget Project estimates that the new law will produce an overall revenue increase of $59 million because of provisions that phase out the state’s federal income tax deduction. Currently, an individual can deduct his or her federal income tax liability up to $5,000, or if a combined return, up to $10,000.
Beginning January 1, 2019, the bill phases out this deduction for individuals based on Missouri adjusted gross income limits. The deduction is allowed at 35 percent for incomes of $25,000 or less; 25 percent for incomes of $25,001 to $50,000; 15 percent for incomes of $50,001 to $100,000; 5 percent for incomes of $100,001 to $125,000; and completely eliminated for incomes exceeding $125,000.
Corporate tax rate drops to 4 percent in 2020
Effective for tax years beginning on or after January 1, 2020, the income tax rate for C corporations will be reduced from the current rate of 6.25 percent to 4 percent.
Business income allocation and apportionment changes
Under current law, Missouri corporations have been able to use three different apportionment methods:
- The default Multistate Tax Compact (MTC) method, which uses an equally-weighted three-factor formula of property, payroll, and sales, and uses greater cost-of-performance sourcing for the sale of items other than tangible personal property;
- An elective “single-factor” method, where the numerator equals revenue from all sales wholly within Missouri plus half of all sales that are partly within and partly outside of Missouri; and
- An elective “single sales factor” method that uses market-based sourcing for revenue from sales of items other than of tangible personal property.
Under S.B. 884, for tax years beginning on or after January 1, 2020, all businesses must allocate and apportion income, which mandates the use of a “single receipts factor” method. For example:
- Taxpayers who lease or license intangible property — The taxpayer’s “market” is in Missouri if and to the extent that the property is used in the state of Missouri. Intangible property used to market a good or service to a consumer is considered used in the state if that good or service is purchased by a customer who is located in Missouri. Franchise fees and royalties received for the license or use of a trade name, trademark, or franchise system generally are considered used in Missouri to the extent the franchise location is in Missouri.
- Taxpayers who sell intangible property — The taxpayer’s “market” is in Missouri if and to the extent that the property is used in Missouri. Receipts from intangible property sales that are contingent upon the productivity, use, or disposition of the intangible property are treated as receipts from the rental, lease, or licensing of the intangible property. Any sale of intangible property not described in the statute is excluded from the numerator and denominator of the receipts factor.
- Taxpayers who sell a service — The related receipts are sourced to Missouri if and to the extent the ultimate beneficiary of the service is located in Missouri. If the ultimate beneficiary of the service rendered by the corporation’s designee is located outside the state, the sale will not be considered to be in Missouri.
- Assignment for receipts —If the state or states of assignment for receipts, other than those from the sale of tangible personal property, cannot be determined under the statutory rules, then the state or states of assignment will be reasonably approximated.
The party seeking to use an alternative method, whether the director or the taxpayer, must prove by a preponderance of the evidence that the statutory provisions do not fairly represent the extent of the taxpayer’s business activities in Missouri and that the chosen alternative is reasonable.
Alternative apportionment changes
Missouri S.B. 884 also addresses alternative apportionment. Under these new provisions, the Missouri Director of Revenue may establish rules for taxpayers engaged in particular industries, while taxpayers that have engaged in particular transactions may require the use of an alternative apportionment method.
The law also clarifies the burden of proof in asserting alternative apportionment. The party seeking to use an alternative method, whether the director or the taxpayer, must prove by a preponderance of the evidence that the statutory provisions do not fairly represent the extent of the taxpayer’s business activities in Missouri and that the chosen alternative is reasonable. A corporation that receives permission to use a different reasonable method shall not have that permission revoked unless there has been a change in the circumstances of the corporation that materially mispresented the facts — upon which the director is allowed use of the alternative method.
Consolidated returns filed on or after August 28, 2018
For returns filed on or after August 28, 2018, all transactions between affiliated group members on a consolidated Missouri income tax return must be eliminated. In addition, the requirement that an affiliated group must derive at least 50 percent of their income from in-state sources in order to file a consolidated return has been deleted from Missouri’s statutes. This change is more administrative in nature, because that statutory requirement was ruled to be unconstitutional by the Missouri Supreme Court in the 1998 General Motors case and has been considered unenforceable for many years.
How we can help
Missouri’s new laws may change the way you approach tax planning. CLA’s state and local tax professionals understand how this state law intersects with the new federal tax reform law. We can help you understand how these changes affect your taxes in 2018 and beyond.