FISCAL NOTE

Date Requested: January 24, 2022
Time Requested: 04:27 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2149 Introduced HB4352
CBD Subject: Taxation


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 provide for an additional modification decreasing federal taxable income. The bill provides for certain definitions. Finally, the bill provides for net liability under apportionment. Per our interpretation, the bill provides for an additional modification decreasing federal taxable income for Corporation Net Income tax purposes. Only publicly traded companies, including affiliated corporations participating in the filing of a publicly traded company’s financial statement are eligible for the modification. If the changes enacted in 2021 to Corporation Net Income tax apportionment and allocation formula, which are effective for tax years beginning on or after January 1, 2022, result in an aggregate increase to the taxpayer’s net deferred tax liability or an aggregate decrease to the taxpayer’s net deferred tax assets, or an aggregate change from a net deferred tax asset to a net deferred tax liability, the taxpayer is entitled to the modification. The recently enacted tax change that prompts this proposed bill alters the income apportionment rules for multi-state corporations by replacing a three-factor formula based on share of payroll, share of property, and share of sales (double-weighted relative to the other two factors) in the State to a single sales factor beginning in Tax Year 2022. The sales factor for service activities is further changed from allocation based on cost of performance to allocation based on market. Corporations with significant payroll and or property in West Virginia relative to sales will generally experience a net tax decrease. Corporations with little or no payroll and or property in West Virginia but a more sizeable share of sales will generally experience a net tax increase associated with the apportionment change. The provisions of this bill would provide future tax relief to these latter types of publicly traded corporations. For the 10-year period beginning with the taxpayer’s taxable year that begins on or after January 1, 2027, the taxpayer is entitled to a modification equal to one-tenth of the amount necessary to offset the increase in net deferred tax liability or decrease in the net deferred tax asset, or the aggregate net change thereof, as computed in accordance with generally accepted accounting principles. Any taxpayer intending to claim the modification must file a statement with the Tax Commissioner on or before July 1, 2023, specifying the total amount the taxpayer is claiming. Thirty states and the District of Columbia have adopted single-sales factor apportionment for some or all industries. Three of those states and the District of Columbia purportedly passed this type of legislation in response to a tax law change adopting required combined reporting for unitary groups. Other states made their changes years before this relatively new concept was introduced as an offset for publicly traded corporations experiencing a net tax increase due to changes in state corporate tax structure. Similar legislation was proposed, but not yet enacted in Maryland, a State moving toward single sales tax apportionment. However, the proposed Maryland law would have limited the decreasing modification narrowly to firms with significant employment in Maryland. The effect of the proposed legislation would vary significantly based on the type of business and their economic performance in the year that they are first subject to the Corporation Net Income tax apportionment changes. According to our interpretation, the legislation, if passed, will cause a not readily quantifiable loss to the General Revenue Fund from FY2027 through FY2036. Available data from tax returns filed in 2018 suggest a potential cost of roughly $32 million over a 10-year period. However, changes due to movement to market-based sourcing for services are not reflected in such data. West Virginia offers a small market in comparison with most other states. Therefore, the impact on publicly traded financial statements from the apportionment change is also likely to be relatively small in most cases. Additional administrative costs incurred by the Tax Department would be $5,000 in FY2023, $32,500 in FY2024 and $22,500 in fiscal years after FY2026. .



Fiscal Note Detail


Effect of Proposal Fiscal Year
2022
Increase/Decrease
(use"-")
2023
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 5,000 22,500
Personal Services 0 0 22,500
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 5,000 0
2. Estimated Total Revenues 0 0 0


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


Per our interpretation, the bill provides for an additional modification decreasing federal taxable income for Corporation Net Income tax purposes. Only publicly traded companies, including affiliated corporations participating in the filing of a publicly traded company’s financial statement are eligible for the modification. If the changes enacted in 2021 to Corporation Net Income tax apportionment and allocation formula, which are effective for tax years beginning on or after January 1, 2022, result in an aggregate increase to the taxpayer’s net deferred tax liability or an aggregate decrease to the taxpayer’s net deferred tax assets, or an aggregate change from a net deferred tax asset to a net deferred tax liability, the taxpayer is entitled to the modification. The recently enacted tax change that prompts this proposed bill alters the income apportionment rules for multi-state corporations by replacing a three-factor formula based on share of payroll, share of property, and share of sales (double-weighted relative to the other two factors) in the State to a single sales factor beginning in Tax Year 2022. The sales factor for service activities is further changed from allocation based on cost of performance to allocation based on market. Corporations with significant payroll and or property in West Virginia relative to sales will generally experience a net tax decrease. Corporations with little or no payroll and or property in West Virginia but a more sizeable share of sales will generally experience a net tax increase associated with the apportionment change. The provisions of this bill would provide future tax relief to these latter types of publicly traded corporations. For the 10-year period beginning with the taxpayer’s taxable year that begins on or after January 1, 2027, the taxpayer is entitled to a modification equal to one-tenth of the amount necessary to offset the increase in net deferred tax liability or decrease in the net deferred tax asset, or the aggregate net change thereof, as computed in accordance with generally accepted accounting principles. Any taxpayer intending to claim the modification must file a statement with the Tax Commissioner on or before July 1, 2023, specifying the total amount the taxpayer is claiming. Thirty states and the District of Columbia have adopted single-sales factor apportionment for some or all industries. Three of those states and the District of Columbia purportedly passed this type of legislation in response to a tax law change adopting required combined reporting for unitary groups. Other states made their changes years before this relatively new concept was introduced as an offset for publicly traded corporations experiencing a net tax increase due to changes in state corporate tax structure. Similar legislation was proposed, but not yet enacted in Maryland, a State moving toward single sales tax apportionment. However, the proposed Maryland law would have limited the decreasing modification narrowly to firms with significant employment in Maryland. The effect of the proposed legislation would vary significantly based on the type of business and their economic performance in the year that they are first subject to the Corporation Net Income tax apportionment changes. According to our interpretation, the legislation, if passed, will cause a not readily quantifiable loss to the General Revenue Fund from FY2027 through FY2036. Available data from tax returns filed in 2018 suggest a potential cost of roughly $32 million over a 10-year period. However, changes due to movement to market-based sourcing for services are not reflected in such data. West Virginia offers a small market in comparison with most other states. Therefore, the impact on publicly traded financial statements from the apportionment change is also likely to be relatively small in most cases. Additional administrative costs incurred by the Tax Department would be $5,000 in FY2023, $32,500 in FY2024 and $22,500 in fiscal years after FY2026. .



Memorandum


The stated purpose of this bill is to provide an additional modification decreasing federal taxable income. The bill provides for certain definitions. Finally, the bill provides for net liability under apportionment. The bill title is defective. The bill title does not mention that a taxpayer may only take the modification for ten years. The bill does not specify which of the four provisos contained in §11-24-7(e) it is referring to. Subsection (f) does not seem to contain language setting forth what constitutes “the extent” that the “subtraction” or “modification” can be claimed. The Tax Commissioner’s authority to review or re-determine the proper amount of any subtraction claimed cannot be limited by subsection (f) whether on the statement required to be filed under subsection (f) or on a tax return for any taxable year. There is no “claw back,” recapture tax, or other “pay back” provision where the business fails to remain in business for a period of 10 years. The bill fails to address apportionment or application of the exclusion where a corporation net income tax filer has one or more combined reporting unitary group entities entitled to the exclusion, and others that are not. The criteria for taxpayers eligible to claim the modification may run afoul of the West Virginia Constitution. Article X of the West Virginia Constitution requires that taxation “be equal and uniform throughout the state…” Also, the proposed bill may arguably violate Section 10 of Article III of the West Virginia State Constitution, which is the state’s equal protection clause. The state legislature “may make reasonable classifications in enacting statutes provided the classifications are based on some real and substantial relation to the objects sought to be accomplished by the legislation, and any person who assails any such classification has the burden or showing that it is essentially arbitrary and unreasonable.” Sylb. Pt. 5, United Fuel Gas Co. v. Battles, 153 W.Va. 222, 167 S.E.2d 890 (1969). The proposed bill does not provide a basis for allowing a tax benefit only to “publicly traded companies, including affiliated corporations participating in the filing of a publicly traded company’s financial statements businesses” as opposed to non-publicly traded companies. The is no provision that addresses the treatment of controlled group Taxpayers, and combined reporting corporation net income tax filers and other “affiliated group” Taxpayers.



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