Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

In the matter of the amendment of ARM 42.17.114, 42.17.218, 42.17.602, 42.17.603, and 42.17.605 pertaining to withholding taxes

)

NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT

TO: All Concerned Persons

1. On March 29, 2018, at 9:30 a.m., the Department of Revenue will hold a public hearing in the 3rd Floor Reception Conference Room of the Sam W. Mitchell Building, located at 125 North Roberts, Helena, Montana, to consider the proposed amendment 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 March 19, 2018, 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 as proposed to be amended provide as follows, new matter underlined, deleted matter interlined:

42.17.114 ANNUAL RECONCILIATION AND WAGE STATEMENTS (1) On or before ~~February 28~~ January 31 of each year, every employer must file with the department a Form MW-3, Montana Annual W-2 1099 Withholding Tax Reconciliation. Form MW-3 must be accompanied by the original copies of each employee's earnings statements on federal Form W-2.

(a) through (4) remain the same.

(5) The federal Form 1099R that has Montana state income tax withholding must be filed with the department in paper or electronic form by ~~February 28~~ January 31 following the year that the tax was withheld.

AUTH: 15-30-2620, MCA

IMP: 15-30-2506, 15-30-2507, MCA

REASON: The department proposes amending ARM 42.17.114 due to the enactment of House Bill 63, L. 2017, which revised the due date for filing the annual reconciliation and wage statements provided in 15-30-2507, MCA. As a result of the new legislation, Form MW-3, Montana Annual W-2 1099 Withholding Tax Reconciliation, is now due on or before January 31 instead of February 28 of each year, beginning in 2018. Therefore, the department proposes changing the dates in (1) and (5) to correspond with the revised date in statute.

42.17.218 EMPLOYER REGISTRATION (1) Every employer required to withhold Montana income tax must register for a Montana tax identification number on Form GenReg, ~~Registration/Application for Permit~~ Montana Department of Revenue Business Registration, which is provided by the department. A new employer who has acquired the business of another employer must not use the predecessor's identification number. Application for a Montana tax identification number shall be sent to:

Department of Revenue

P.O. Box 5805

Helena, Montana 59604-5805.

(2) and (3) remain the same.

AUTH: 15-30-2620, MCA

IMP: 15-30-2503, 15-30-2509, MCA

REASON: The department proposes amending ARM 42.17.218 to update the name of the "Form GenReg, Registration/Application for Permit" to "Form GenReg Montana Department of Revenue Business Registration," in (1), to correspond with the department's revision of the form name in the fall of 2017.

The department also proposes updating the implementing section of the rule to include 15-30-2503, MCA.

The proposed amendment of this rule is unrelated to any new legislation being addressed in this same rulemaking notice.

42.17.602 CLAIMING THE CREDIT FOR TAX WITHHELD (1) Claiming credit for the tax withheld shall be accomplished as follows:

(a) remains the same.

(b) Taxpayers, excluding pass-through entities, ~~who are shareholders in a corporation taxed under Subchapter S of the IRC doing business in this state must maintain a copy of federal~~ that receive a Montana Schedule K-1 from a pass-through entity, as defined in 15-30-2101, MCA~~. They~~ may claim a refundable credit for the amount shown as their ~~percentage~~ share of the tax withheld from Montana net royalty ~~payments by the corporation, limited liability company, or partnership~~. Taxpayers that claim such a credit must keep copies of the federal and Montana Schedule K-1(s) in their records.

(c) Pass-through entities must determine the owner's distributive share of mineral royalty withholding in proportion of the owner's share of profit and loss from the pass-through entity.

(d) A pass-through entity may claim mineral royalty withholding tax paid on its behalf as a credit against pass-through withholding tax owed by the pass-through entity on behalf of an owner in proportion of the owner's distributive share of profit or loss.

(e) A pass-through entity must claim the mineral withholding tax paid on its behalf as a refundable credit against composite tax owed by the pass-through entity on behalf of an owner in proportion of the owner's distributive share of income or loss.

AUTH: 15-30-2547, MCA

IMP: 15-30-2539, 15-30-3312, 15-30-3313, MCA

REASON: The department proposes amending ARM 42.17.602 to expand and better organize the rule as it currently only pertains to claiming refunds for mineral royalty withholding when received by an individual through an S corporation. As amended, the rule is expanded to apply to any taxpayers receiving mineral royalty withholding from all types of pass-through entities, as defined in 15-30-2101, MCA. The department proposes adding new language to provide the calculation required for allocating mineral royalty withholding between owners of a pass-through entity and to lay out the provisions allowing for pass-through entities to claim refund of mineral royalty withholding, as follows:

Section (1)(b), pertaining to mineral royalty withholding, is expanded to include mineral royalty withholding distributed by all types of pass-through entities to any type of owners, excluding pass-through entities. Like for shareholders of S corporations, a taxpayer that is not a pass-through entity and that directly owns interest in a partnership or a disregarded entity, is entitled to claim a refundable credit for mineral withholding paid to the extent that is reported by the entity on the Montana Schedule K-1.

New (1)(c) is being added to describe how a pass-through entity must allocate mineral royalty withholding to its owners in proportion of the owner's share of profit and loss. The intent behind this new language is to provide a calculation that remains simple and covers the majority of cases. The department acknowledges that, in theory, mineral royalty or mineral royalty withholding could be subject to a special allocation in the framework of a partnership agreement. In some cases, when the allocation of Montana source income defers from the federal allocation, this calculation may create discrepancies between the amounts of mineral royalty withholding applied to each owner and what partners may expect on their Schedule K-1 from special allocations. However, the department has determined that taking into account such allocations would create undue complications for most pass-through entities when they file their returns. In addition, when these situations do occur, mineral withholding remains refundable when received by a partner even if this partner has no mineral royalty income to report.

New (1)(d) is being added to describe one of two circumstances when the mineral royalty withholding can be claimed by a pass-through entity. A pass-through entity may claim a refund of excess mineral royalty withholding when it substitutes the mineral royalty withholding for pass-through withholding. This substitution may occur when the pass-through entity is required to calculate pass-through withholding on the owners' share of Montana source income. In general, such substitution does not lead to a refund but results in an additional amount of pass-through withholding owed because the owners' share of Montana source income is likely to equal or exceed the amount of mineral royalty income distributed to each owner. However, when the amount of Montana source income distributed is less than the amount of mineral royalty, the amount of pass-through withholding may be less than the amount of mineral royalty withholding paid. When this is the case, the pass-through entity may claim the difference as a refund. This refund is allowed in order to keep the withholding amount as proportional as possible to the Montana tax that burdens the owners. Finally, a recalculation of the pass-through withholding tax by itself is not sufficient to make the pass-through entity eligible for the refund. The recalculation must result in an amount of pass-through withholding "owed" to make a substitution and the refund of the excess possible. In other words, refunds of mineral royalty withholding are allowed when a pass-through withholding tax is burdening the owners. When no withholding tax is owed, as when Montana source losses are in excess of Montana source income or when a pass-through withholding tax is not required, the substitution is not allowed and the mineral royalty withholding must be fully distributed to the owners.

New (1)(e) is being added to describe the second circumstance when a pass-through entity can claim the mineral royalty withholding. When an owner elects to pay composite tax, the pass-through entity must apply the distributive share of the owner's mineral royalty withholding against the composite tax, as no other tax derived from this pass-through income will be owed in Montana, provided the election is valid. The pass-through entity must then claim the refund of any excess mineral royalty withholding over the composite tax.

The language in newly numbered (1)(f), previously (1)(c), remains the same, which means that a trust or an estate must still bifurcate the credit between the portion it can claim against its own Montana tax and the portion that must be allocated to beneficiaries. Current (1)(d) and (e) also remain the same, but are renumbered as (1)(g) and (h) to accommodate the expansion of the rule content.

The proposed amendment of this rule is unrelated to any new legislation being addressed in this same rulemaking notice.

42.17.603 APPLICABLE THRESHOLDS - CHANGE OF OWNERSHIP - PUBLICLY TRADED PARTNERSHIPS - NONPROFIT ORGANIZATIONS - EXEMPT ROYALTY OWNERS (1) through (7) remain the same.

(8) The person described in (7) may not be required to withhold net royalty payments from their royalty interest owners if the person can provide information that satisfies the department that the net royalty payments are immaterial.

(a) The department has defined an entity that has immaterial net royalty payments as an entity that has production amounts for minerals, other than oil and gas, with a value less than $5 million. The only filing requirement for this type of entity is the filing of the Form RW-3 by ~~February 28~~ January 31 of the following year along with a listing of all royalty recipients. The $5 million value will be based on a three-year average of production value reported to the department's Business Tax and Valuation Bureau. For example, the department will calculate whether an entity is required to withhold from its royalty interest owners for ~~2015~~ 2017 by averaging the valuation reported for ~~2011, 2012, and 2013~~ 2013, 2014, and 2015.

(9) through (13) remain the same.

AUTH: 15-30-2547, MCA

IMP: 15-30-2538, 15-30-2539, 15-30-2540, 15-30-2541, 15-30-2542, 15-30-2543, 15-30-2544, 15-30-2545, 15-30-2546, 15-30-2547, ~~15-30-3540,~~ 15-31-102, MCA

REASON: The department proposes amending ARM 42.17.603 due to the enactment of House Bill 63, L. 2017, which revised the due date for filing the annual royalty and tax statement provided in 15-30-2544, MCA. As a result of the new legislation, Form RW-3, Montana Annual Mineral Royalty Withholding Tax Reconciliation, is now due on or before January 31, instead of February 28, of each year beginning in 2018. Therefore, the department proposes changing the date in (8)(a) to correspond with the revised date in statute.

The department further proposes updating the years used in the example in (8)(a); and proposes correcting a typographical error in the implementing citations for the rule by striking the reference to 15-30-3540, MCA, and replacing it with 15-30-2540, MCA.

42.17.605 FILING REQUIREMENTS (1) The following forms are to be completed and filed in accordance with instructions provided by the department:

(a) and (b) remain the same.

(c) Form RW-3, Montana Annual Mineral Royalty Withholding Tax Reconciliation, must be filed on or before ~~February 28~~ January 31 of each year. Form RW-3 must be accompanied by copies of each royalty owner's withholding statements on federal form 1099-MISC, Miscellaneous Income, or Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding;

(d) remains the same.

(e) Each remitter that is exempt from withholding is still required to file the Form RW-3 with the department along with a copy of Form 1099-MISC, Miscellaneous Income, or Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, for every recipient of royalties. These reports are due on or before ~~February 28~~ January 31 of each year; and

(f) through (3) remain the same.

AUTH: 15-30-2547, MCA

IMP: 15-30-2538, 15-30-2539, 15-30-2541, 15-30-2543, 15-30-2544, MCA

REASON: The department proposes amending ARM 42.17.605 due to the enactment of House Bill 63, L. 2017, which revised the due date for filing the annual royalty and tax statement provided in 15-30-2544, MCA. As a result of the new legislation, Form RW-3, Montana Annual Mineral Royalty Withholding Tax Reconciliation, is due on or before January 31, instead of February 28, of each year beginning in 2018. Therefore, the department proposes changing the dates in (1)(c) and (1)(e) to correspond with the revised date in statute.

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: 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 April 11, 2018.

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

6. 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 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 4 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.

7. An electronic copy of this notice is available on the department's web site revenue.mt.gov, or on the Secretary of State's web site sos.mt.gov/ARM/register.

8. The bill sponsor contact requirements of 2-4-302, MCA, apply and have been fulfilled. The primary sponsor of House Bill 63, Representative Jim Hamilton, was contacted by regular mail on June 14, 2017, and January 26, 2018.

9. Regarding the requirements of 2-4-111, MCA, the department has determined that the amendment of the above-referenced rules will not significantly and directly impact small businesses. Documentation of this determination is available at revenue.mt.gov or upon request from the person in 4.

/s/ Laurie Logan /s/ Mike Kadas

Laurie Logan Mike Kadas

Rule Reviewer Director of Revenue

Certified to the Secretary of State February 13, 2018.