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| Montana Administrative Register Notice 42-2-867 | No. 16 08/25/2011 | |
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BEFORE THE DEPARTMENT OF REVENUE OF THE STATE OF
TO: All Concerned Persons 1. On September 19, 2011, at 1:00 p.m., a public hearing will be held in the Third Floor Reception Area Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the amendment of the above-stated rules. Individuals planning to attend the hearing shall enter the building through the east doors of the 2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the Department of Revenue no later than 5:00 p.m., September 12, 2011, to advise us of the nature of the accommodation that you need. Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail [email protected]. 3. The rules proposed to be amended provide as follows, stricken matter interlined, and new matter underlined: 42.21.158 PROPERTY REPORTING REQUIREMENTS (1) remains the same. (2) As determined by the department, (a) Starting in tax year 2012, the aggregate market value of class eight property owned by an individual or business entity will be taxed as follows: (i) the first $2 million of taxable market value will be taxed at the rate of 2 percent; and, (ii) all taxable market value in excess of $2 million will be taxed at the rate of 3 percent. (b) If the conditions provided in 15-6-138, MCA, are met, the aggregate market value of class eight property owned by an individual or business entity, as provided in (2), will be taxed as follows: (i) the first $3 million of taxable market value will be taxed at the rate of 1.5 percent; and, (ii) all taxable market value in excess of $3 million will be taxed at the rate of 3 percent. (c) The department will apply the operative tax rates identified in (a) or (b) to an individual's or business entity's class eight property by: (i) determining the fraction obtained by dividing the appropriate threshold level, $2 million or $3 million, respectively, as identified in (a)(i) or (b)(i), by the individual's or business entity's total aggregated class eight taxable market value; (ii) determining the portion of class eight property in each location that will receive the reduced tax rate, as identified in (a) or (b), by multiplying the fraction obtained in (c)(i), by the taxable market value of class eight property in each location owned by an individual or business entity; (iii) multiplying the appropriate tax rate, identified in (a)(i) or (b)(i), by the fractional portion of the individual's or business entity's class eight property; and (iv) applying the 3 percent rate, identified in (a)(ii) and (b)(ii), to the remaining fractional portion of the individual's or business entity's class eight property identified in (c)(ii). (d) The following are examples of how the provisions of (2)(a), (b), and (c) apply: (i) Example 1. On January 1, 2012, Taxpayer X owns class eight property with a total taxable market value of $5 million in four different locations throughout the state. The 2 percent rate for the first $2 million of aggregate taxable market value is applied to the property in each location as follows:
After adjustment for the tax rate difference, the taxable value at each location is determined by multiplying the amounts allocated to each location by the applicable tax rates and adding the results.
The mills for the levy district within which each property is located are applied to this total taxable value. Various government subdivisions have the authority to impose mills to raise taxes. They are sometimes collectively referred to as "taxing jurisdictions." The department creates a levy district for each distinct geographic area in the state where the same mills apply to all of the properties. For example, location 1 could be in a levy district that has mills imposed by the state, county, a high school district, and a mosquito district; location 2 could be in a levy district that has mills imposed by the state and county; location 3 could be in a levy district that has mills imposed by the state, county, a high school district, a grade school district, and a rural fire district; and location 4 could be in a levy district that has mills imposed by the state, county, city, and an urban transportation district. (ii) Example 2. On January 1, 2012, Taxpayer Y owns class eight property with a total taxable market value of $2 million in four different locations throughout the state. No allocation of Taxpayer Y's property between the 2 percent and 3 percent tax rates is required. The property at each location is taxed at the 2 percent rate.
The mills for the levy district within which each property is located are applied to this total taxable value. (iii) Example 3. On January 1, 2012, Taxpayer Z owns class eight property with a total taxable market value of $19,000 in four different locations throughout the state. Because the class eight property of an individual or business entity that owns an aggregate of $20,000 or less in market value of class eight property is exempt from taxation, (2)(a), (b), and (c) do not apply to Taxpayer Z. (iv) Example 4. Assume the same facts as in (i) Example 1, but with the added fact that one of the locations is within a tax increment financing district (TIFD). The calculations and results of Example 1 do not change: the total taxable value is determined the same way and the mills for the levy districts are applied the same way. The fact that there is a TIFD changes only how the taxes that are levied are distributed.
(4) remains the same but is renumbered (3).
(a) the taxpayer provides evidence of their inability to comply with the timeframes set forth in (b) evidence that this/these condition(s), while not necessarily continuous, existed at sufficient levels in the period of January 1 to March 15 to prevent timely filing of the reporting form. (6) remains the same but is renumbered (5). (6) For purposes of determining the statewide aggregate taxable market value of class eight property of an individual or business entity, the class eight property of an individual or business entity includes all property the individual or business entity owns, claims, possesses, controls, or manages by himself, herself, or itself directly or indirectly through an affiliated entity or family member. As used in this rule, "affiliated entity" means: (a) a member of a combined group of unitary corporations filing a Montana corporation license tax return; (b) a member of an affiliated group of corporations filing a U.S. Consolidated Income Tax Return; (c) any corporation if the individual or business entity directly or indirectly owns more than 50 percent of the stock value or voting power; (d) any partnership if the individual or business entity directly or indirectly owns more than 50 percent of capital interests or profits interests in the partnership; (e) a corporation and a partnership if the same persons own: (i) more than 50 percent in value of the corporation's stock; and (ii) more than 50 percent of the capital interest or the profits interest in the partnership; (f) an S corporation and another S corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; (g) an S corporation and a C corporation, if the same individuals own more than 50 percent in value of the outstanding stock of each corporation; and (h) any trust, if the individual or business entity is the grantor or a beneficiary. (7)
(a) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is considered as being owned proportionately by or for its shareholders, partners, or beneficiaries; and (b) an individual is considered as owning the stock owned, directly or indirectly, by the individual's spouse or minor child. (8) (a) affirm on their personal property and business equipment reporting form that they have no affiliated entities; or (b) identify their affiliated entities on their personal property and business equipment reporting form. (9) (a) affirm on their personal property and business equipment reporting form that they have no affiliated entities; or (b) identify their affiliated entities on their personal property and business equipment reporting form as provided in (8).
IMP: 15-1-121, 15-1-303, 15-6-138, 15-8-104, 15-8-301, 15-8-303, 15-8-309, 15-9-101, 15-24-902, 15-24-903, 15-24-904, 15-24-905, MCA REASONABLE NECESSITY: The department proposes to amend ARM 42.21.158 in response to recent legislative action. Chapter 411, L. 2011, requires special low rates for class eight property. Ch. 411 establishes a new 2 percent tax rate for the first $2 million of statewide class eight property. It also establishes a new 1.5 percent tax rate for the first $3 million of statewide class eight property based on the state's economic performance as measured by individual and corporation license tax collections. The creation of these new tax rates also directs the department to calculate the county's entitlement share accordingly because of the loss in taxable value. Chapter 411, needs to be read in conjunction with the existing provisions of 15-8-301, MCA, in order to make logical sense and be consistent with the fiscal note that accompanied the passage of Ch. 411. Standing by itself, Ch. 411 establishes a lower tax rate for the first $2 million of class eight property without defining the context to which the $2 million applies. Read literally, Ch. 411 could be interpreted as applying to the first $2 million of the aggregate total taxable class eight property owned collectively by all owners of such property. However, the fiscal note accompanying Ch. 411 assumes that the lower rate applies to the first $2 million of property of each taxpayer. To arrive at that result, Ch. 411 needs to be read in conjunction with 15-8-301, MCA, which sets ownership, claim, possession, control or management as the standards for determining the property attributable to each taxpayer. The enactment of Ch. 411, highlighted the need to establish clear rules under 15-8-301, MCA, to assist taxpayers in determining all property that is under their possession, control, or management so they can accurately self-report their statewide class eight property. Section (2), as amended, implements Ch. 411 and explains that the lower rate will be applied statewide to a percent of each item of property. It also explains how that percent is calculated. The current sections (7) and (8) are being deleted because they are not necessary with the new standards for determining the commonly controlled affiliated entities. The four examples are provided to aid taxpayers in understanding how the calculations provided (2)(a), (b), and (c) may affect their property. As amended, this rule underscores the need to have clear and equitable standards for determining what constitutes ownership and control, under 15-8-301, MCA. It serves as a direct implementation of Ch. 411 and achieves the objectives of equalization among individual taxpayers as required by 15-9-101, MCA. In providing for these standards and their enforcement as outlined in (8) and (9), the department establishes the criteria, processes, and standards to decide personal property ownership and personal property aggregation by owner. The department is also proposing to amend the references to statutory authority and implementing statutes. These amendments include the addition of 15-9-201, MCA, which describes the department's statutory authority relating to the equalization of values and the addition of 15-1-121 and 15-6-138, MCA, as implementing statutes. 42.21.160 DEFINITIONS For purposes of this chapter the following definitions apply: (1) "Affiliated entity" has the meaning given the term in ARM 42.21.158.
(a) a limited liability company treated for tax purposes as a sole proprietorship; (b) a corporation (foreign or domestic); (c) a not-for-profit corporation; (d) a profit and not-for-profit unincorporated association; (e) a business trust; (f) limited liability company; (g) limited liability partnership; (h) a small business corporation; or (i) a partnership. (3) through (7) remain the same, but are renumbered (4) through (8).
(9) "Family member," as used in ARM 42.21.158, means spouse or minor child. (10) "Individual" has the meaning given to the term "person" as found in ARM 42.2.304. (11) "Levy district" means a geographically distinct area where the same mill levies apply to all of the properties. (12) "Taxing jurisdiction" means a governmental subdivision with the authority to tax. (9) remains the same, but is renumbered (13). IMP: 15-1-121, 15-1-137, 15-6-138, 15-8-104, MCA
REASONABLE NECESSITY: The department proposes to amend the definitions rule to explain the meaning of some of the terms individuals and entities with business equipment and personal property need to understand to accurately report their affiliated entities, so that the department can determine the identity and location of the statewide property eligible for a reduced 2 percent tax rate. "Affiliated entity" is being defined in (1) and "aggregate" is being amended in (2) to reflect the statutory language used for aggregating related entities. The definition revision in (3)(a) is necessary to avoid potential confusion between business carried on by an individual without ever forming any type of entity, which is historically what the term "sole proprietorship" referred to, and business carried on by an individual through a wholly-owned limited liability company, which is now also treated for many purposes as a "sole proprietorship." The term "family" is very narrowly defined to include only spouses and minor children, when common control is expected to exist. The department did not propose to adopt the broader familial relationships similar to those included in the Internal Revenue Code (IRC) section 267. This section of the IRC is applicable in instances of denying losses between related taxpayers, which includes all parents, children, and siblings. It is overbroad and would group family businesses where there is no effective common control or management. The department proposes to add the definition of "individual" to the definitions rule and strike the definition of "person" to avoid any potential confusion from inconsistent definitions, as "person" is defined in 1-1-201, MCA, and ARM 42.2.304, and, as used in many of the related applicable statutes, means both individuals and business entities. The department believes that by revising these definitions, they will be more explanatory to the taxpayers who use them, and contribute to a more accurate and efficient business equipment and personal property reporting process. Moreover, the department seeks to limit instances of over-combining property that is separately managed and controlled, by providing further guidance through the definitions. 4. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail [email protected] and must be received no later than September 23, 2011. 5. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing. 6. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Locate "Legal Resources" in the left hand column, select the "Rules" link and view the options under the "Notice of Proposed Rulemaking" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems. 7. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. Such written request may be mailed or delivered to the person in 4 above or faxed to the office at (406) 444-4375, or may be made by completing a request form at any rules hearing held by the Department of Revenue. 8. The bill sponsor contact requirements of 2-4-302, MCA, apply and have been fulfilled. The primary bill sponsor of Senate Bill 372, Senator Bruce Tutvedt was contacted on July 13, 2011, by regular mail, and subsequently by e-mail on August 12, 2011. /s/ Cleo Anderson /s/ Dan R. Bucks CLEO ANDERSON DAN R. BUCKS Rule Reviewer Director of Revenue Certified to Secretary of State August 15, 2011
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A directory of state agencies is available online at http://www.mt.gov/govt/agencylisting.asp.
For questions about the organization of the ARM or this web site, contact [email protected].
