United States

District of Columbia ensures franchise tax reduction

Enacts further emergency legislation to conform with existing ordinances

TAX ALERT  | 

On May 19, 2016, the District of Columbia adopted the Unincorporated Franchise Tax Clarification Emergency Amendment Act of 2016, effective from April 26, 2016, to conform the imposition of the corporate franchise tax to the FY 2015 Budget Support Emergency Act (Budget Act).

The Budget Act provided for certain reductions in the individual and business franchise tax rates. Contingent on certain revenue thresholds, the franchise tax rate may be reduced in priority of the following rates: 9.2, 9.0, 8.75, 8.5, and then to 8.25 percent. The franchise tax imposition ordinances were also amended to include an identical reduction schedule, however, the 9.2 percent step-down was not provided for in the imposition ordinance.

To correct the drafting inconsistency, the District first adopted the Fiscal Year 2016 Budget Support Clarification Emergency Amendment Act of 2016, effective Jan. 27, 2016, which amends the franchise tax imposition statute to include the 9.2 percent step-down, and thus, conforms the reduction schedule with the Budget Act. However, the District’s charter limits all emergency legislation, which bypasses the 30-day congressional review period to a 90-day effective period. In order for legislation to continue to be effective as amended after the 90-day period, the District must pass additional emergency legislation or temporary legislation, or permanent legislation. This second round of emergency legislation is effective for another 90-day period from the day the legislation was adopted, May 19, 2016, to Aug. 17, 2016.

For tax years beginning after Dec. 31, 2015, the franchise tax rate was reduced to 9.2 percent due to available revenue. It is unclear whether the District will continue to adopt emergency legislation to address the 9.2 percent rate reduction, but no additional conforming legislation should be necessary once the rate is reduced to 9.0 percent and the rate reduction schedules in the Budget Act and franchise tax imposition ordinances become identical for further reductions.

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