06.24.11

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Washington, D.C.

On June 14, 2011, the Council of the District of Columbia approved the Fiscal Year 2012 Budget Support Act of 2011, which provides for a combined reporting scheme for unitary groups, a double-weighted sales factor apportionment formula applicable to the District's corporate franchise tax, a limitation of itemized deductions for personal income taxpayers, and a 8.5% tax on the interest paid on municipal bonds issued by municipalities outside of the District.  The Act also imposes a sales tax collection responsibility on certain online vendors whether or not they have a physical presence or other nexus with the District, and would increase the sales tax rate.  This Act shall take effect following approval by the Mayor (or in the event of veto by the Mayor, action by the Council to override the veto), a 30-day period of Congressional review, and publication in the District of Columbia Register.

Combined Reporting
Applicable to tax years beginning after December 31, 2010, any taxpayer engaged in a unitary business with one or more other corporations that are part of a water's-edge combined group must file a combined report that includes the income and the allocation and apportionment factors and other information as required by the mayor. If a worldwide combined reporting election has been made, the taxpayer must file a combined report that includes such income and factors of all corporations that are members of the unitary business and other information as required by the mayor. The enactment also provides that the mayor may require combination of additional taxpayers in order to reflect proper apportionment of income of the entire unitary businesses.

Net operating loss carryover: If the taxable income computed results in a loss for a taxpayer member of the combined group, that taxpayer member has a District net operating loss, subject to the net operating loss limitations and carryover provisions. The net operating loss will be applied as a deduction in a prior or subsequent year only if that taxpayer has District source positive net income, whether or not the taxpayer is or was a member of a combined reporting group in the prior or subsequent year.

Separate identities of group member: The use of a combined report will not disregard the separate identities of the taxpayer members of the combined group. Each taxpayer member is responsible for tax based on its taxable income or loss apportioned or allocated to the District, which would include, in addition to other types of income, the taxpayer member's apportioned share of business income of the combined group, where business income of the combined group is calculated as a summation of the individual net business incomes of all members of the combined group. A member's net business income is to be determined by removing all but business income, expense, and loss from that member's total income.

Tax credits and post-apportionment deductions: No tax credit or post-apportionment deduction earned by one member of the group, but not fully used by or allowed to that member, may be used by another member of the group or applied against the total income of the combined group. A post-apportionment deduction carried over into a subsequent year as to the member that incurred it, and available as a deduction to that member in a subsequent year, will be considered in the computation of the income of that member in the subsequent year regardless of the composition of that income as apportioned, allocated, or wholly within the District.

Double-Weighted Sales Factor
For tax years beginning after December 31, 2010, a three-factor apportionment formula with a double-weighted sales factor (currently, an evenly weighted three-factor formula) has been approved applicable to all business income.

Limitation of Itemized Deductions
In the case of an individual whose District adjusted gross income exceeds $200,000 ($100,000 in the case of separate return filed by a married individual), the amount of the itemized deductions otherwise allowable for the taxable year has been reduced by 5% of the excess of District adjusted gross income over the applicable amount.

Non-DC Municipal Bonds
An 8.5% tax on the interest paid on municipal bonds issued by municipalities located outside of the District was approved.  Previously, taxpayers in the District were not taxed on interest from municipal bonds regardless of whether the bonds were issued inside or outside of the District. 

Remote Seller Collection Requirements
Under the Internet tax provisions, a remote vendor would be required to collect and remit tax on sales via the Internet of property or services to a purchaser in the District. A "remote vendor" would mean a seller that sells property or services to purchasers in the District, regardless of whether the seller has a physical presence or nexus with the District. A remote vendor would be exempt from the requirement if it has a specified level of cumulative gross receipts from Internet sales to purchasers in the District. The bill does not indicate the level of gross receipts under which a vendor would be exempt, and requires the District to meet a number of conditions before it can require collection.

Sales Tax Rate Increase
The sales tax rate would increase to 6% from 5.75%, applicable as of July 1, 2011.

Texas

Texas has enacted legislation that provides that a person whose only activity in Texas is being a user of “Internet hosting” is not engaged in business in Texas. Internet hosting means “providing to an unrelated user access over the Internet to computer services using property that is owned or leased and managed by the provider and on which the user may store or process the user ’s own data or use software that is owned, licensed, or leased by the user or provider.”  For example, a North Carolina user whose only contact with Texas is using an email service that uses a server housed in Texas won’t have nexus with Texas.  Prior to this legislation there was ambiguity whether these types of users would have nexus with Texas.  Thus, taxpayers whose contact with Texas is limited to the use of “Internet hosting” won’t have nexus with Texas.  However, taxpayers should note that this legislation does not include telecommunications services. 

A copy of the enacted bill can be found at: http://www.capitol.state.tx.us/tlodocs/82R/billtext/pdf/HB01841F.pdf

Should you have any questions about how these tax law changes might affect you, please contact Mike Fletcher at mfletcher@argy.com.

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