United States

Montana enacts market-based sourcing provisions

Effective for tax years beginning after Dec. 31, 2017

TAX ALERT  | 

On May 3, 2017, Montana Gov. Steve Bullock signed House Bill 511, adopting several provisions of the Multistate Tax Compact (Compact), including revised definitions and the replacement of the state’s cost of performance sourcing provisions with the Compact’s market-based sourcing provisions. House Bill 511 is effective for tax years beginning after Dec. 31, 2017.

Accordingly, the following provisions have been adopted:

  • The state’s definitions of sales, business income and nonbusiness income are replaced with the Compact’s model definitions of receipts, apportionable income and nonapportionable income, respectively.
  • The state’s cost-of-performance apportionment methodology for sales other than sales of tangible personal property is replaced with the Compact’s market-based sourcing provisions.
  • Inclusion of the ‘throwout rule’ for sales assigned to states where the taxpayer is not taxable or if the state of assignment cannot be determined or reasonably approximated.
  • The Compact’s special apportionment provisions. House Bill 511 provides that the party demonstrating that the allocation and apportionment provisions do not fairly represent the extent of the taxpayer's business activity is subject to a ‘preponderance of the evidence’ standard.

Additionally, House Bill 511 provides that a partnership or S corporation with business activity both within and outside of the state calculates its Montana source income pursuant to the state’s corporate income tax allocation and apportionment provisions. A disregarded entity that is not owned by an individual, estate or trust and that has business activity occurring both within and outside of the state calculates its Montana source income also pursuant to the corporate income tax allocation and apportionment provisions.

Takeaways

The fiscal notes of House Bill 511 refer to the adoption of similar provisions in California, which netted the state additional revenue totaling approximately 1 percent of the tax base. Applying that result to Montana, the adoption of the Compact provisions result in $1.5 million of additional estimated annual revenue. No changes have been proposed to the states equally-weighted three-factor apportionment formula. Taxpayers impacted by the changes should speak to their tax advisors before those provisions take effect for 2018 tax years.

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