FISCAL NOTE

Date Requested: February 24, 2021
Time Requested: 03:44 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2849 Introduced SB373
CBD Subject: Governor -- Bills Requested By


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The stated purpose of this bill is to modernize the collection of income taxes by adopting uniform treatment of mobile employee income and by ending the “throw out” rule, which provided that gross receipts from untaxed sales of tangible personal property are excluded from the denominator of the sales factor when apportioning the business income of the taxpayer, which resulted in higher state income taxes. This bill also changes the apportionment of sales of services and intangible personal property to market sourcing instead of origin sourcing, which would make West Virginia’s treatment similar to treatment by the majority of jurisdictions. Lastly, this bill eliminates the payroll and property factors and thus apportions income on a single sales factor only. Per our interpretation, the new Personal Income Tax provision, which becomes effective July 1, 2021, would exclude the income from non-resident mobile employees from state source income for West Virginia Personal Income Tax purposes if: (1) they have no other income from sources within West Virginia for that tax; (2) they were present in the state to perform employment duties for not more than 30 days; and (3) their state of residence provides a similar exclusion or does not have income tax. The section does not apply to certain types of compensation, including income from professional athletes, professional entertainers, individuals of prominence who perform for compensation on a per-event basis, individuals in construction services or natural resource production, or those who are ”key employees”. Thirty-two states and the District of Columbia have already adopted similar rules; therefore, this legislation would bring West Virginia in-line with most jurisdictions. The bill also amends and reenacts provisions of the allocation and apportionment section of the West Virginia Corporation Net Income Tax, effective January 1, 2022. The apportionment formula is used where a corporation has income from both inside and outside of West Virginia. Under current law, apportionment of income is typically done using a four-factor formula consisting of a property factor, a payroll factor, and a double weighted sales factor. This bill would convert the apportionment formula to a single sales factor formula with the numerator being sales in West Virginia and the denominator being sales everywhere. Businesses already incur tax liabilities on property and payroll in West Virginia. Moving to a single sales factor apportionment will prevent businesses from being penalized for locating within the state. Twenty-nine states and the District of Columbia have already adopted similar rules. In addition, this bill would eliminate the current throw-out rule which requires taxpayers to exclude from their West Virginia corporate income tax calculations sales from states in which they were not subject to tax. The throw-out rule effectively increases the West Virginia Corporation Income Tax burden relative to the burden based solely on the fraction of sales made in the State. This bill adopts market-based sourcing for services and intangible property. Under a “market-based sourcing” rule, sales of services go into the sales factor numerator based on whether the service is delivered to a customer in this state. Intangible property that is rented, leased, or licensed, or a contract right or government license would be included in the numerator of the sales factor if they were used in this state. All other types of intangible property not listed in the bill are excluded from the numerator and denominator of the sales factor. Thirty-two states and the District of Columbia have already adopted similar rules; therefore, this legislation would bring West Virginia in-line with most jurisdictions. Per our interpretation, if this bill becomes law, the new Personal Income Tax provision would have a minimal impact on General Revenue Fund collections. Passage of the bill would also amend the allocation and apportionment section of the Corporation Net Income Tax. The effect of the proposed amendments to the Corporation Net Income tax would vary by taxpayer based on the type of business and their economic performance in any given year. The changes to the Corporation Net Income tax allocation and apportionment formula should be revenue neutral over time with losses associated with elimination of the throw-out rule offset by gains associated with a move to market-based sourcing for allocation of services between states. Additional administrative costs incurred by the Tax Department would be $25,000 in FY2023.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2021
Increase/Decrease
(use"-")
2022
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 0
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


Per our interpretation, the new Personal Income Tax provision, which becomes effective July 1, 2021, would exclude the income from non-resident mobile employees from state source income for West Virginia Personal Income Tax purposes if: (1) they have no other income from sources within West Virginia for that tax; (2) they were present in the state to perform employment duties for not more than 30 days; and (3) their state of residence provides a similar exclusion or does not have income tax. The section does not apply to certain types of compensation, including income from professional athletes, professional entertainers, individuals of prominence who perform for compensation on a per-event basis, individuals in construction services or natural resource production, or those who are ”key employees”. Thirty-two states and the District of Columbia have already adopted similar rules; therefore, this legislation would bring West Virginia in-line with most jurisdictions. The bill also amends and reenacts provisions of the allocation and apportionment section of the West Virginia Corporation Net Income Tax, effective January 1, 2022. The apportionment formula is used where a corporation has income from both inside and outside of West Virginia. Under current law, apportionment of income is typically done using a four-factor formula consisting of a property factor, a payroll factor, and a double weighted sales factor. This bill would convert the apportionment formula to a single sales factor formula with the numerator being sales in West Virginia and the denominator being sales everywhere. Businesses already incur tax liabilities on property and payroll in West Virginia. Moving to a single sales factor apportionment will prevent businesses from being penalized for locating within the state. Twenty-nine states and the District of Columbia have already adopted similar rules. In addition, this bill would eliminate the current throw-out rule which requires taxpayers to exclude from their West Virginia corporate income tax calculations sales from states in which they were not subject to tax. The throw-out rule effectively increases the West Virginia Corporation Income Tax burden relative to the burden based solely on the fraction of sales made in the State. This bill adopts market-based sourcing for services and intangible property. Under a “market-based sourcing” rule, sales of services go into the sales factor numerator based on whether the service is delivered to a customer in this state. Intangible property that is rented, leased, or licensed, or a contract right or government license would be included in the numerator of the sales factor if they were used in this state. All other types of intangible property not listed in the bill are excluded from the numerator and denominator of the sales factor. Thirty-two states and the District of Columbia have already adopted similar rules; therefore, this legislation would bring West Virginia in-line with most jurisdictions. Per our interpretation, if this bill becomes law, the new Personal Income Tax provision would have a minimal impact on General Revenue Fund collections. Passage of the bill would also amend the allocation and apportionment section of the Corporation Net Income Tax. The effect of the proposed amendments to the Corporation Net Income tax would vary by taxpayer based on the type of business and their economic performance in any given year. The changes to the Corporation Net Income tax allocation and apportionment formula should be revenue neutral over time with losses associated with elimination of the throw-out rule offset by gains associated with a move to market-based sourcing for allocation of services between states. Additional administrative costs incurred by the Tax Department would be $25,000 in FY2023.



Memorandum


The stated purpose of this bill is to modernize the collection of income taxes by adopting uniform treatment of mobile employee income and by ending the “throw out” rule, which provided that gross receipts from untaxed sales of tangible personal property are excluded from the denominator of the sales factor when apportioning the business income of the taxpayer, which resulted in higher state income taxes. This bill also changes the apportionment of sales of services and intangible personal property to market sourcing instead of origin sourcing, which would make West Virginia’s treatment similar to treatment by the majority of jurisdictions. Lastly, this bill eliminates the payroll and property factors and thus apportions income on a single sales factor only. The bill title does not mention the internal effective dates or that the bill defines terms. There are also two subparagraph (i) under §11-24-7(e)(12)(C).



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov