BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

 

In the matter of the amendment of ARM 42.23.108, 42.23.109, 42.23.112, 42.23.113, 42.23.116, 42.23.212, 42.23.303, 42.23.312, 42.23.313, 42.23.403, 42.23.421, 42.23.424, 42.23.601, 42.23.702, 42.23.802, 42.23.803, 42.23.804, 42.23.805, 42.26.101, 42.26.202, 42.26.301, 42.26.302, 42.26.311, 42.26.313, and 42.26.505 and the repeal of ARM 42.23.117 pertaining to corporate income tax

) ) ) ) ) ) ) ) )

NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT AND REPEAL

 

TO: All Concerned Persons

 

1. On September 29, 2016, at 11 a.m., the Department of Revenue will hold a public hearing in the Third Floor East Conference Room of the Sam W. Mitchell Building, located at 125 North Roberts, Helena, Montana, to consider the proposed amendment and repeal of the above-stated rules. The hearing room is most readily accessed by entering through the east doors of the building facing Sanders Street.

 

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 no later than 5 p.m. on September 12, 2016, to advise us of the nature of the accommodation you need. Please contact Laurie Logan, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-7905; fax (406) 444-3696; or e-mail [email protected].

 

3. The rules proposed to be amended provide as follows, new matter underlined, deleted matter interlined:

 

42.23.108 CONDITIONS FOR EXEMPTION FOR DIVIDENDS (1) through (1)(b) remain the same.

(c) It is substantiated that the taxpayer has invested in the small business investment company and that the small business investment company has invested in companies located within Montana. The small business investment company must provide a report as part of the annual filing of the Montana corporation license corporate income tax return.

 

AUTH: 15-33-105, MCA

IMP: 15-33-102, 15-33-106, MCA

 

REASON: The department proposes amending ARM 42.23.108(1)(c) as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with this name change enacted by the 2013 Legislature.

 

42.23.109 REPORTING REQUIREMENTS (1) The small business investment company shall report as part of the corporation license corporate income tax return the following information on a form provided for that purpose:

(a) through (2) remain the same.

 

AUTH: 15-33-105, MCA

IMP: 15-33-104, MCA

 

REASON: The department proposes amending ARM 42.23.109(1) as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" in (1) to correspond with this name change enacted by the 2013 Legislature.

 

42.23.112 RESEARCH AND DEVELOPMENT - APPLICATION AND ELIGIBILITY (1) through (3) remain the same.

(4) To obtain the corporate license income tax exemption, the firm must file an annual application with the department before the end of the first calendar quarter during which the firm does business in Montana. The initial application must be filed before the end of the first complete calendar quarter during which the corporation is engaged in business in Montana. For example, if a corporation began operating in Montana on September 15, that corporation would have until December 31 of that year to file for the exemption.

(5) remains the same.

 

AUTH: 15-31-501, 15-1-201, MCA

IMP: 15-6-135, 15-31-103, MCA

 

REASON: The department proposes amending ARM 42.23.112(4) as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with this name change enacted by the 2013 Legislature.

 

42.23.113 RESEARCH AND DEVELOPMENT FIRM - EXEMPTION PERIOD

(1) An entity that qualifies as a research and development firm as defined in 15-1-101, MCA, and is incorporated or qualified to do business in Montana on or after July 1, 1987, is exempt from the corporation license corporate income tax on the net income earned from research and development activities for its first five tax periods.

(2) A corporation which qualifies as a research and development firm under 15-1-101, MCA, and began operating in Montana prior to July 1, 1987, will be allowed an exemption from the Montana corporation license tax on research and development net income earned on or after July 1, 1987, for the balance of its first five tax periods of activity in Montana.

 

AUTH: 15-31-501, MCA

IMP: 15-31-103, MCA

 

REASON: The department proposes amending ARM 42.23.113 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with this name change enacted by the 2013 Legislature.

The department also proposes removing outdated language in (2) applying to tax periods prior to July 1987.

 

42.23.116 UNRELATED INCOME (1) Income earned by a research and development firm which is unrelated to research and development activities is not eligible for the five-year exemption from the Montana corporation license corporate income tax. In making the determination of whether income earned is related to research and development activities, the department will review the facts presented in each case. However, the following examples demonstrate how the department would decide under certain situations.

(a) through (d) remain the same.

 

AUTH: 15-31-501, MCA

IMP:  15-31-103, MCA

 

REASON: The department proposes amending ARM 42.23.116 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with this name change enacted by the 2013 Legislature.

 

42.23.212 BASIS FOR DISPOSITION OF PROPERTY (1) The basis for determining gain or loss from the sale or other disposition of property shall be the basis prescribed by the IRC and regulations in effect during the reporting period, except such provisions therein as are inconsistent with the express provisions of these regulations or the Corporate License Tax Act 15-31-113, MCA.

(2) In applying the federal rules pertaining to basis, the effective date of this act shall be substituted for the effective date of the Federal Income Tax Act.

 

AUTH: 15-31-313, 15-31-501, MCA

IMP: Title 15, chapter 31, part 3 15-31-113, MCA

 

REASON: The department proposes amending ARM 42.23.212 to delete the reference to the Corporate License Tax Act in (1) and specifically reference 15-31-113, MCA, instead.

The department also proposes removing all of (2). This language was included in the rule when it was adopted in 1972 and the department has determined it is no longer necessary.

The department further proposes inserting the applicable statute in place of the larger chapter reference in the implementing section of the rule in keeping with the Secretary of State's current ARM formatting standards.

 

42.23.303 CHANGE IN FEDERAL TAX OR RETURN (1) Taxpayers are required to report to the department adjustments or corrections to their taxable income made by the IRS or other competent authority by filing an amended Montana corporate income tax return within 90 days after receiving official notice of such change or correction. If the adjustments or corrections result in an overpayment of tax, the refund claim must be made within the statute of limitation set forth in 15-31-509, MCA.

(a) If the taxpayer fails to report these adjustments or corrections within files an amended Montana corporate income tax return more than 90 days thereafter: after receiving official notice and has not by written agreement suspended the federal statute of limitations,

(a) for tax periods beginning before March 13, 1997, the period within which a deficiency in tax may be assessed extends for three years from the date the changes or corrections in the taxpayer's federal taxable income become final and are filed with the department.

(b) for tax periods beginning after March 13, 1997, the period within which a deficiency in tax may be assessed extends for three years from the date the changes or corrections in the taxpayer's federal taxable income become final and are filed with the department.

(b) If the taxpayer fails to file an amended Montana corporate income tax return after receiving official notice, the department may at any time assess tax or begin a proceeding in court for the collection of the tax without assessment pursuant to 15-31-544, MCA.

(2) If a taxpayer files an amended federal income tax return for any year changing or correcting his its taxable income, and if the taxpayer fails is required to file a corresponding amended Montana corporation license corporate income tax return with the department within 90 days thereafter: after filing the amended federal return. If the adjustments or corrections result in an overpayment of tax, the refund claim must be made within the statute of limitations set forth in 15-31-509, MCA.

(a) for tax periods beginning after March 13, 1997

(a) If the taxpayer files an amended Montana corporate income tax return more than 90 days after filing the amended federal return and has not by written agreement suspended the federal statute of limitations, the period within which a deficiency in tax may be assessed extends for three years from the date the corresponding amended Montana corporation license tax return is filed; and

(b) for tax periods beginning before March 13, 1997, the period within which a deficiency in tax may be assessed extends for five years from the date the corresponding amended Montana corporation license tax return is filed.

(b) If the taxpayer fails to file an amended Montana corporate income tax return, the department may at any time assess tax or begin a proceeding in court for the collection of the tax without assessment pursuant to 15-31-544, MCA.

(3) Changes or corrections by a taxpayer to federal taxable income, including changes that increase or decrease a net operating loss must be reported to the department through the filing of an amended Montana corporate income tax return within the time prescribed in 15-31-509, MCA, regardless of whether or not an amended federal income tax return was filed.

(4) No de minimis standard applies to the requirements for reporting changes or corrections to federal taxable income. Taxpayers are required to report all such changes and corrections to the department.

 

AUTH: 15-31-501, MCA

IMP: 15-31-506, 15-31-509, 15-31-544, MCA

 

REASON: The department proposes amending ARM 42.23.303 to include more detail in the rule for better guidance to taxpayers regarding their reporting requirements when they have a change in federal taxable income, and what actions the department may take when such changes are not reported. The additional detail proposed to be added into the rule is intended to be informational and is not a change in the department's long-standing practice. The department also proposes removing outdated language applying to tax periods beginning before March 13, 1997.

The department further proposes adding 15-31-544, MCA, as an implementing statute for the rule in support of the department's authority to assess tax and/or begin a proceeding in court for the collection of tax.

 

42.23.312 FILING REQUIREMENTS FOR INACTIVE CORPORATIONS

(1) Foreign Both foreign and domestic corporations which have either qualified to do business in Montana and all domestic corporations or are registered to do business in Montana and not engaged in business in Montana during the reporting period are required to file either an annual return returns even though not engaged in business in Montana during the reporting period or an annual affidavit provided by the department for such purposes. No tax is assessable against a corporation which was not engaged in business during the reporting period. In such cases

(a) If a return is filed, the return must bear the name and address of the corporation, the signature of an officer, contact information, and a statement on the face of the return or attached to the return to the effect that the corporation was not engaged in business in Montana during the reporting period. No tax is assessable against a corporation which was not engaged in business during the reporting period.

(b) If an affidavit is filed, the corporation must use the affidavit provided by the department. It must be completed and signed by an officer of the corporation.

(2) A dormant corporation can obtain relief from the filing requirement by executing and filing an affidavit provided by the department for the purpose.

 

AUTH: 15-31-501, MCA

IMP: 15-31-101, 15-31-111, MCA

 

REASON: The department proposes amending ARM 42.23.312 to provide more detail in the rule for better guidance to taxpayers regarding the filing requirements for inactive corporations.  The additional detail proposed to be added into the rule is intended to be informational and is not a change in the department's long-standing practice. The language being removed from (2) was incorporated into (1).

 

42.23.313 FILING REQUIREMENTS UPON DISSOLUTION, WITHDRAWAL, OR CESSATION OF BUSINESS (1) When a domestic corporation seeks to dissolve, or when a foreign corporation seeks to withdraw or ceases business in Montana, the following requirements must be met for the purpose of corporation license tax clearance obtaining a Dissolution/Withdrawal Certificate:

(a) A return clearly marked "Final Return" must be filed for the short period commencing with the closing date of the last period for which a return was filed and extending to the date of dissolution, withdrawal, or cessation of business in this state.

(b) A schedule must be attached to the final return showing the disposition made of the corporate assets. If the corporation sold its assets, any gain or loss from the disposition thereof must be included in the determination of net income, unless:

(i) the liquidation of the corporation comes within the purview of section 337, IRC (1954); and

(ii) the corporation is not required to report gain pursuant to 15-31-113, MCA.

(c) Payment of the tax must be made for the final period and all other corporation license tax for which the corporation may then be liable.

(a) a completed and signed Application for Tax Certificate (Form CR-T) must be submitted to the department;

(b) all required tax returns must be filed;

(c) all taxes, interest, and penalties must be paid; and

(d) an assumption of Montana tax liabilities must be filed with the department on a Form ATL if the corporation is:

(i) party to a merger or consolidation; or

(ii) included in the combined filing of another corporation subject to tax under 15-31-101, MCA, and a final return is not filed.

(2) When a domestic corporation has completed its dissolution or when a foreign corporation has completed its withdrawal and seeks a Tax Clearance Certificate, the following requirements must be met:

(a) a completed and signed Form CR-T must be submitted to the department;

(b) a return clearly marked "Final Return" must be filed for the short period commencing with the closing date of the last period for which a return was filed and extending to the date of dissolution, withdrawal, or cessation of business in this state;

(c) a schedule must be attached to the final return showing the disposition made of the corporate assets. If the corporation sold its assets, any gain or loss from the disposition thereof must be included in the determination of net income, unless the corporation is not required to report gain pursuant to 15-31-113, MCA; and

(d) all taxes, interest, and penalties must be paid.

(3) If a corporation subject to (2) is party to a merger or consolidation, or is included in the combined filing of another corporation subject to tax under 15-31-101, MCA, and a final return is not filed, a Tax Clearance Certificate will not be issued.

(4) Corporations not engaged in business in Montana during the reporting period may file an annual affidavit in lieu of returns as provided for in ARM 42.23.312.

 

AUTH: 15-31-501, MCA

IMP: 15-31-143, MCA

 

REASON: The department proposes amending ARM 42.23.313 to provide more detail in the rule for better guidance to taxpayers regarding the requirements for obtaining a Dissolution/Withdrawal Certificate or a Tax Clearance Certificate from the department. The additional detail is intended to be informational and to provide guidance to taxpayers regarding their request of the proper certificate for their needs.

 

42.23.403 TREATMENT OF OTHER TAXES PAID (1) Taxes paid within the year, with the exception of the following taxes specifically excluded as deductions by statute are:

(a) Montana corporation license corporate income tax;

(b) remains the same.

(c) taxes on or according to or measured by net income or profits, imposed by authority of the government of the United States; or

(d) remains the same.

(2) With the exception of the contractor's gross receipts tax, taxes may be claimed only as deductions in determining net income and cannot be converted into a credit against the corporation license corporate income tax. See ARM 42.23.501 ARM 42.4.3103 for details concerning the credit allowed with respect to the contractor's gross receipts tax.

 

AUTH: 15-31-313, 15-31-501, MCA

IMP: 15-31-114, MCA

 

REASON: The department proposes amending ARM 42.23.403 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with a change to the name enacted by law in 2013.

In a recent biennial review of its rules, the department identified areas in this rule in need of housekeeping measures and therefore proposes adding a missing word in (1)(c) to properly format the outline in that subsection and updating a rule number reference in (2) to reflect the current number of that rule as transferred after this rule was adopted.

 

42.23.421 DEDUCTION FOR INVESTMENT FOR ENERGY CONSERVATION (1) remains the same.

(2) This deduction must be claimed on the form provided by the department. The complete form must be attached to the taxpayer's corporation license corporate income tax return for the year in which the deduction is claimed.

 

AUTH: 15-31-501, MCA

IMP: 15-32-103, MCA

 

REASON:  The department proposes amending ARM 42.23.421(2) as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with a change to the name enacted by the 2013 Legislature.

 

42.23.424 SALE OF LAND TO A BEGINNING FARMER - CORPORATION LICENSE CORPORATE INCOME TAX DEDUCTION (1) through (4) remain the same.

 

AUTH: 15-1-201, MCA

IMP: 80-12-211, MCA

 

REASON: The department proposes amending the title of ARM 42.23.424 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with a change to the name enacted by the 2013 Legislature.

 

42.23.601 REFUNDS AND CREDITS (1) remains the same.

(2) For tax periods beginning before March 13, 1997, no refund or credit may be allowed or paid with respect to the year for which a return is filed, unless, within five years from the last day prescribed for filing the return or after one year from the date of the overpayment (whichever period expires later), the taxpayer files a claim for refund thereof or the department has determined the existence of the overpayment and has approved refunding or crediting thereof. The five-year period is determined without regard to any extension which may have been granted.

(2) A refund claim made after the expiration of the limitation period set forth in (1) and in 15-31-509, MCA, is limited to payments received after that date.

 

AUTH: 15-31-501, MCA

IMP: 15-31-509, MCA

 

REASON: The department proposes amending ARM 42.23.601 to provide more detail in the rule for better guidance to taxpayers regarding the limitation of a refund claim made after the expiration of the statute of limitations occurs. The additional detail proposed to be added into the rule is intended to be informational and is not a change in the department's long-standing practice.

The department also proposes removing outdated language in (2) applying to tax periods beginning before March 13, 1997.

 

42.23.702 TAXATION OF A LIMITED LIABILITY COMPANY (1) The taxation of a limited liability company in Montana depends upon its federal classification as a corporation or a partnership as determined by the IRS, regardless of whether an entity is recognized as a limited liability company under the Montana Limited Liability Company Act. For example, a limited liability company may be formed in Montana with one member; however, in order to be taxed as a partnership for federal purposes, and consequently for Montana purposes, the limited liability company must have at least two members. If the limited liability company is taxed as a "C" or "S" corporation for federal tax purposes, then it must file the corresponding Montana corporation license corporate income tax return with the department as provided for under Title 15, chapter 31, MCA. If a limited liability company is treated as a partnership for federal tax purposes, then it must file a partnership return reflecting each member's share of the income/loss, and also, the members must file Montana individual income tax returns reflecting their share of the income/loss of the limited liability company. These returns are to be filed with the department as provided for under Title 15, chapter 30, MCA.

(2) remains the same.

 

AUTH: 15-1-201, MCA

IMP: Title 35, chapter 8 15-31-101, MCA

 

REASON: The department proposes amending ARM 42.23.702 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" in (1) to correspond with this name change enacted by the 2013 Legislature.

The department further proposes inserting the applicable statute in place of the larger chapter reference in the implementing section of the rule in keeping with the Secretary of State's current ARM formatting standards.

 

42.23.802 CARRYOVERS OF NET OPERATING LOSSES (1) through (3) remain the same.

(4) For taxable periods beginning after December 31, 1988, a taxpayer may elect to forego forgo the entire carryback period. Montana corporation license corporate income tax form CLT-4 Form CIT provides an area to perfect this election. When form CLT-4 Form CIT is filed with the department, the election must be clearly marked in the area provided on that form. If no indication is made in the area provided on form CLT-4 Form CIT, the net operating loss will be carried back and applied as provided in (1). For state purposes, an election to forego forgo a federal net operating loss carryback provision will not be accepted as a valid election.

 

AUTH: 15-31-501, MCA

IMP: 15-31-119, MCA

 

REASON: The department proposes amending ARM 42.23.802 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with this name change enacted by the 2013 Legislature, to correct the name of a form, and to change the spelling of a word.

 

42.23.803 FILINGS IN CONNECTION WITH NET OPERATING LOSSES

(1) through (2)(a) remain the same.

(b) For purposes of calculating the net operating loss deduction, each member of a unitary group engaged in business in this state must calculate its individual share of the unitary group's net income by applying its individual apportionment factor to the net income of the unitary group, then applying its individual net operating loss available as calculated in (2)(a).

(3) and (3)(a) remain the same.

(b) For tax periods beginning before March 13, 1997, claims for refund of tax resulting from a net operating loss carryback must be filed within five years from the due date of the return for the year to which the loss is carried or within one year from the date of the overpayment, whichever period expires later.

(4) remains the same.

 

AUTH: 15-31-501, MCA

IMP: 15-31-119, 15-31-509, MCA

 

REASON:  The department proposes amending ARM 42.23.803 as a matter of housekeeping to correct a format error in (2)(b) and to remove an outdated subsection of language applying to tax periods beginning before March 13, 1997 in (3).

 

42.23.804 TREATMENT OF MERGERS, AND CONSOLIDATIONS, AND REORGANIZATIONS (1) and (2) remain the same.

(3) In the case of a corporate entity that has converted to a disregarded entity, no net operating loss deduction may be claimed for net operating losses incurred by the corporate entity prior to the date of conversion.

 

AUTH: 15-31-501, MCA

IMP: 15-31-114, MCA

 

REASON: The department proposes amending ARM 42.23.804 to provide guidance to taxpayers regarding the treatment of net operating losses when a corporate entity converts to a disregarded entity. The language proposed to be added to the rule is intended to be informational and is not a change in the department's long-standing practice.

The department also proposes a change to the rule title to encompass the inclusion of the proposed language in (3).

 

42.23.805 TREATMENT OF NET OPERATING LOSSES SPANNING A CHANGE IN REPORTING METHODS (1) and (2) remain the same.

(3) Except as provided in (2), if a corporation incurs a net operating loss and files a return for the year to which the loss is carried carries that loss to a year that was filed under a different filing method, the net operating loss deduction may be limited. The Both the tax period in which the net operating loss is being deducted and the net operating loss must be recalculated to the using the correct filing method of the year in which the loss is being deducted before the deduction is allowed. For example,:

(a) if a corporation incurs a net operating loss in a prior separate company year, and wishes to carry that loss forward or back to a future combined year and a combined return is the taxpayer's proper filing method for each period, the loss must be recalculated as if it were filed on a combined, unitary basis before being carried to the combined year.; or

(b) if a corporation incurs a net operating loss in a combined year filed correctly on a unitary basis, and wishes to carry back that loss to a prior, incorrectly filed, separate company year (or other incorrect filing method), the separate company year must be recalculated as if it were filed on a combined, unitary basis before the deduction is allowed.

(4) For purposes of applying a net operating loss deduction, a taxpayer or the department may undertake the necessary corrections described in (3) even if the affected tax year has already closed via the expiration of the statute of limitations. By correcting the filing method (or net operating loss), neither the taxpayer nor the department is reopening a closed year, but rather is deriving the correct figure to use for an open-year claim.

 

AUTH: 15-31-313, 15-31-501, MCA

IMP:  15-31-119, MCA

 

REASON: The department proposes amending ARM 42.23.805 to provide more detail in the rule for better guidance to taxpayers regarding the calculation and application of net operating losses when they have a change in filing method. The additional detail proposed to be added into the rule is intended to be informational and to include examples and is not a change in the department's long-standing practice for treating net operating losses that are affected by a change in filing method.

The department proposes the additional language in (4) to include more detail in the rule for better guidance to taxpayers when they are making the necessary corrections provided in (3). The additional detail proposed to be added into the rule is intended to be informational and is not a change in the department's long-standing practice in calculating the allowable net operating loss deduction when a claim is made for an open year and the deduction is determined, in whole or in part, from tax periods that are closed for assessment or refund of tax.

 

42.26.101 ALTERNATIVE TAX (1) remains the same.

(2) The election to pay the alternative tax is made by filing a return on Form CLT-4 CIT, reporting the dollar amount of Montana gross sales, and paying a tax determined on the basis of 1/2 percent of the amount of such sales. The $50 minimum tax does not apply to the alternative tax. The gross receipts from sales made in Montana must be determined according to the provisions of ARM 42.26.255 and 42.26.257. A statement must be attached to the return to the effect that the corporation's only activities in Montana consist of making sales and do not include owning or renting real property or tangible personal property.

 

AUTH: 15-31-501, MCA

IMP: 15-31-101, 15-31-131, 15-31-122, MCA

 

REASON: The department proposes amending ARM 42.26.101 as a matter of housekeeping to correct the name of a form referenced in the rule.

 

42.26.202 DEFINITIONS The following definitions apply to terms used in this subchapter:

(1) "Allocation" refers to means the assignment of nonbusiness income to a particular state.

(2) "Annual rent" is means the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property.

(a) and (b) remain the same.

(3) "Annual rental rate" is means the amount paid as rental for the property for a 12-month period (i.e., the amount of the annual rent). Where property is rented for less than a 12-month period, the rent paid for the actual period of rental shall constitute the "annual rental rate" for the tax period. However, where a taxpayer has rented property for a term of 12 or more months and the current tax period covers a period of less than 12 months (due, for example, to a reorganization or change of accounting period), the rent paid for the short period shall be annualized. If the rental term is for less than 12 months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month-to-month basis.

(4) "Apportionment" refers to means the division of business income between states by the use of a formula containing apportionment factors.

(5) "Average value" of property" means the amount determined by averaging the values at the beginning and ending of the income tax year, but the department may require the averaging of monthly values during the income year or such averaging as necessary to effect properly the average value of the property. (See ARM 42.26.237.)

(6) The term "base "Base of operations" is means the place of more or less permanent nature from which the an employee starts his their work and to which he they customarily returns return in order to receive instructions from the taxpayer or communications from his their customers or other persons, to replenish stock or other materials, repair equipment, or to perform any other function necessary to exercise his their trade or profession at some other point or points. The term "place from which the service is directed or controlled" refers to the place from which the power to direct or control is exercised by the taxpayer.

(7) remains the same.

(8) "Business activity" refers to means the transactions and activity occurring in the regular course of a particular trade or business of a taxpayer.

(9) The term "compensation "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services; provided, that such amounts constitute income to the recipient under the federal IRC. In the case of employees not subject to the federal IRC, e.g., those employed in foreign countries, the determination of whether such benefits or services would constitute income to the employees shall be made as though such employees were subject to the federal IRC.

(10) "Costs of performance" means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer to perform the income-producing activity which gives rise to the particular item of income. Included in the taxpayer's cost of performance are taxpayer's payments to an agent or independent contractor for the performance of personal services and utilization of tangible and intangible property which give rise to the particular item of income.

(10)(11) The term "employee "Employee" means any officer of the corporation; or any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person will be considered to be an employee if he is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act; except that, since certain individuals are included within the term "employees" in the Federal Insurance Contributions Act who would not be employees under the usual common law rules, it may be established that a person who is included as an employee for purposes of the Federal Insurance Contributions Act is not an employee for purposes of this rule.

(11) remains the same, but is renumbered (12).

(13) "Income-producing activity" applies to each separate item of income and means the transactions and activity engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of producing that item of income. Such activity includes transactions and activities performed on behalf of the taxpayer, such as those conducted on its behalf by an independent contractor. Income-producing activity includes, but is not limited to:

(a)  the rendering of personal services by employees or by an agent or independent contractor acting on behalf of the taxpayer or the utilization of tangible and intangible property by the taxpayer or by an agent or independent contractor acting on behalf of the taxpayer in performing a service;

(b)  the sale, rental, leasing, licensing, or other use of real property;

(c)  the rental, leasing, licensing, or other use of tangible personal property; or

(d)  the sale, licensing, or other use of intangible personal property.

(12) remains the same, but is renumbered (14).

(13)(15) A "mobile "Mobile property mile" is means the movement of a unit of mobile property a distance of one mile whether loaded or unloaded.

(14) and (15) remain the same, but are renumbered (16) and (17).

(16)(18) "Original cost" is deemed to be means the basis of the property for federal income tax purposes (prior to any federal income tax adjustments, except for subsequent capital additions, improvements thereto, or partial dispositions); or, if the property has no such basis, the valuation of such property for interstate commerce commission purposes. If the original cost of property is unascertainable under the foregoing valuation standards, the property is included in the property factory at its fair market value as of the date of acquisition by the taxpayer. (See ARM 42.26.235.)

(17) remains the same, but is renumbered (19).

(18)(20) The term "real "Real and tangible personal property" includes land, buildings, machinery, stocks of goods, equipment, and other real and tangible personal property, but does not include coin or currency.

(19) remains the same, but is renumbered (21).

(20) and (21) remain the same, but are renumbered (23) and (24).

(22)(25) The "value"Value of owned real and tangible personal property" shall mean means its original cost. (See ARM 42.26.235.)

(23)(26) The "value of rented"Value of rented real and tangible personal property" means the product of eight times the net annual rental rate. (See ARM 42.26.236.)

(24) remains the same, but is renumbered (22).

 

AUTH: 15-1-201, 15-31-313, 15-31-501, MCA

IMP: 15-1-601, 15-31-301, 15-31-302, 15-31-303, 15-31-304, 15-31-305, 15-31-306, 15-31-307, 15-31-308, 15-31-309, 15-31-310, 15-31-311, 15-31-312, 15-31-321, 15-31-322, 15-31-323, 15-31-324, 15-31-325, 15-31-326, MCA

 

REASON: The department proposes amending ARM 42.26.202 to define the terms "costs of performance" and "income producing activity," as used in this subchapter, to provide additional guidance for corporate taxpayers who are reporting sales other than sales of tangible personal property in the sales apportionment factor. The department seeks to provide reasonable consistency with other states by implementing these definitions that have been adopted by the Multistate Tax Commission.

As a matter of housekeeping, the department also proposes updating the lead-in sentence of the rule to make it consistent with the lead-in statements found in other definition rules in ARM Title 42. The department further proposes adding the word "means" directly following each term reference where it is missing and appropriate to include for consistency with this format in other definition rules. The proposed reformatting and renumbering of the rule is intended to eliminate unnecessary words and correct the alphabetical order of the rule to make the terms easier to locate.

 

42.26.301 WATER'S-EDGE ELECTION (1) Only multinational corporations subject to the Montana corporate license corporate income tax may apportion income under a water's-edge, unitary combination method as set forth in 15-31-322, MCA.

 

AUTH: 15-31-501, MCA

IMP: 15-31-322, MCA

 

REASON: The department proposes amending ARM 42.26.301 as a matter of housekeeping to update the name "corporation license tax" to "corporate income tax" to correspond with this name change enacted by the 2013 Legislature.

 

42.26.302 PROCEDURE (1) To perfect a water's-edge election, a taxpayer must complete Form WE – ELECT and file the form with the department within the first 90 days of the first tax year of the three-year period for which the election is to become effective. If the first tax period for which the election is to become effective is less than 90 days, the taxpayer will have until the end of the tax period to file the election. The election must disclose the taxpayer's identity and a complete listing of all affiliates owned in excess of 50 percent.

(a) A taxpayer cannot make a water's-edge election for prior tax periods.

(b) If a taxpayer files a water's-edge election after the 90-day deadline, the taxpayer must establish reasonable cause for failing to satisfy the 90-day deadline.

(i) Reasonable cause is defined in ARM 42.2.304. Examples of what ordinarily does or does not constitute reasonable cause are provided in ARM 42.3.105.

(ii) Failure to timely file a water's-edge election on the belief that an election was unnecessary because the taxpayer incorrectly asserted a nonunitary relationship with the foreign corporation(s) does not constitute reasonable cause.

(2) and (3) remain the same.

(4) As stated in (3), the water's-edge election is binding for a three-year renewable period. If a taxpayer wishes to continue to file on a water's-edge basis, a Form WE – ELECT must again be filed with the department within the first 90 days of the first tax year of the three-year period for which the election is to become effective.

 

AUTH: 15-31-501, MCA

IMP: 15-31-324, MCA

 

REASON: The department proposes amending ARM 42.26.302 to include additional detail highlighting the department's long-standing practice (as found in Form WE – ELECT) concerning the disallowance of "retroactive" water's-edge elections.

The department also proposes a housekeeping amendment in (1) to strike excess language from the rule. The requirement to file Form WE – ELECT sufficiently covers the taxpayer's requirement to disclose all affiliates owned in excess of 50 percent, which therefore renders the inclusion of this detail in the rule unnecessary.

In regards to a water's-edge election, the department proposes amending the rule to include helpful language in new (1)(b) that will direct the public to the reasonable cause guidelines defined in ARM 42.2.304, and the examples provided in ARM 42.3.105.

 

42.26.311  CERTAIN CORPORATIONS INCLUDABLE IN A WATER'S-EDGE COMBINED RETURN (1) through (3) remain the same.

(4)  A If a corporation incorporated outside the United States, if is "engaged in business" or "doing business" pursuant to 15-31-101, MCA, in this state, it is included in a water's-edge return.

(5) remains the same.

 

AUTH: 15-31-501, MCA

IMP: 15-31-322, MCA

 

REASON: The department proposes amending ARM 42.26.311 to provide better guidance to taxpayers regarding the inclusion in a water's-edge combined group of all corporations engaged or doing business in Montana. The proposed amendment is intended to be informational and is not a change in the department's long-standing practice.

 

42.26.313 REORGANIZATIONS OF WATER'S-EDGE TAXPAYERS

(1) through (5) remain the same.

(6) If a nonwater's-edge taxpayer is purchased or otherwise acquired by an entity not subject to tax under 15-31-101, MCA, and whose parent and affiliates are not subject to tax under 15-31-101, MCA, the taxpayer may make a valid water's-edge election as provided for in ARM 42.26.302. The taxpayer must complete Form WE – ELECT and file the form with the department within the first 90 days after the purchase or acquisition date.

(7) If a nonwater's-edge taxpayer who did not previously own greater than 50 percent of an entity incorporated outside the United States purchases or otherwise acquires an entity incorporated outside the United States, the taxpayer may make a valid water's-edge election as provided for in ARM 42.26.302. The taxpayer must complete Form WE – ELECT and file the form with the department within the first 90 days after the acquisition date.

 

AUTH: 15-31-501, MCA

IMP: 15-31-324, MCA

 

REASON:  The department proposes amending ARM 42.26.313 to include more detail in the rule for added guidance to taxpayers regarding the procedures necessary for making a valid water's-edge election in certain situations. The additional language proposed to be added into the rule is intended to be informational and is not a change in the department's long-standing practice regarding a water's-edge election and the acquisition of a nonwater's-edge taxpayer by an entity not subject to tax in Montana, and the acquisition of a foreign entity by a Montana taxpayer that has not previously owned foreign entities.

 

42.26.505 SPECIFIC LISTING OF UNPROTECTED AND PROTECTED ACTIVITIES (1) through (2)(o) remain the same.

(p) owning, leasing, using, or maintaining any of the following facilities or properties in-state:

(i) and (ii) remain the same.

(iii) any kind of office other than an in-home office as described and permitted under (2)(r) and (3)(b);

(iv) through (2)(r) remain the same.

(s) entering into franchising or licensing agreements, selling or otherwise disposing of franchises and licenses, or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchisor or licensor to its franchisee or licensee within the state; or

(t) shipping or delivering goods into Montana by means of:

(i) private vehicle;

(ii) rail;

(iii) air; or

(iv) other carrier, irrespective of whether a shipment or delivery fee or other charge is imposed, directly or indirectly, upon the purchaser; or

(u)(t) conducting any activity not listed in (3) which is not entirely connected to requests for orders, even if such activity helps to increase purchases.

(3) remains the same.

 

AUTH: 15-1-201, 15-31-313, MCA

IMP: 15-1-601, 15-31-301, 15-31-302, 15-31-303, 15-31-304, 15-31-305, 15-31-306, 15-31-307, 15-31-308, 15-31-309, 15-31-310, 15-31-311, 15-31-312, MCA

 

REASON: The department proposes amending ARM 42.26.505(2) to make a format correction in (p), and to strike the language in (t) to remove from the list of unprotected activities the shipment or delivery of goods into Montana by various methods, because these are no longer considered activities that, in and of themselves, would create a taxable nexus with Montana. This change is being proposed to make the language in this rule consistent with that used by the Multistate Tax Commission in its uniformity guidelines.

 

4. The department proposes to repeal the following rule:

 

42.23.117 SURTAX

 

AUTH: 15-31-501, MCA

IMP: 15-31-121, MCA

 

REASON: In a recent biennial review of its rules, the department determined that ARM 42.23.117 is no longer necessary and can be repealed, because the language in 15-31-121, MCA, regarding surtaxes, was repealed by the 1999 Legislature.

 

5. 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: Laurie Logan, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-7905; fax (406) 444-3696; or e-mail [email protected] and must be received no later than October 13, 2016.

 

6. Laurie Logan, Department of Revenue, Director's Office, has been designated to preside over and conduct this hearing.

 

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 that includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notice regarding a particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. A written request may be mailed or delivered to the person in 5 above or faxed to the office at (406) 444-3696, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

 

8. An electronic copy of this notice is available on the department's web site at revenue.mt.gov/rules. 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. While the department also strives to keep its web site accessible at all times, in some instances it may be temporarily unavailable due to system maintenance or technical problems.

 

9. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

 

10. With regard to the requirements of 2-4-111, MCA, the department has determined that the amendment and repeal of the above-referenced rules may significantly and directly impact small businesses. Documentation of the department's determination is available at revenue.mt.gov/rules or upon request from the person in 5.

 

 

/s/ Laurie Logan                          /s/ Mike Kadas

Laurie Logan                               Mike Kadas

Rule Reviewer                             Director of Revenue

         

Certified to the Secretary of State August 22, 2016