United States

North Dakota enacts single sales factor phase-in election

TAX ALERT  | 

On April 20, 2015, North Dakota Gov. Jack Dalrymple signed into law SB 2292, which amends provisions relating to the apportionment of business income  to establish a voluntary election for businesses that are not pass-through entities to use an alternative apportionment method that phases in single sales factor apportionment. Furthermore, the law repeals the optional apportionment computation of the Multistate Tax Compact (MTC).

Under existing law, all taxpayers are generally required to use an equally weighted 3-factor apportionment formula pursuant to N.D. Cent. Code section 57-38.1-09. Under the revisions implemented by SB 2292, equally weighted 3-factor apportionment remains the default for C corporations, nonresident sole proprietorships, partnerships, S corporations, and other pass-through entities with business activity partly within North Dakota and partly outside of North Dakota, but corporations may elect to use an alternative apportionment formula that phases in single sales factor apportionment. 

For the first two tax years beginning after Dec. 31, 2015, taxpayers that are not pass-through entities can elect to use a 50 percent weighted sales factor. For the first taxable year after Dec. 31, 2017, taxpayers that are not pass-through entities can elect to use a 75 percent weighted sales factor. For tax years beginning after Dec. 31, 2018, taxpayers that are not pass-through entities can elect to use a single sales factor. Each election is binding for five tax years, must be made on a timely filed original return, and is applicable to all entities in a unitary group and for those filing a consolidated North Dakota return. Unless a taxpayer elects single sales factor apportionment in the year immediately following the final year of their election, the taxpayer must use equally weighted 3-factor apportionment for three years before making another election. Taxpayers that do not elect an alternative apportionment formula must continue to use the equally weighted 3-factor formula.

In addition, SB 2292 repeals North Dakota’s statutes where it had adopted Articles III and IV of the MTC. These articles generally address apportionment mechanics and specified the use of equally weighted apportionment factors. They also included the MTC’s provisions for petitioning the state for use of alternate apportionment or allocation methods. Because the state’s default apportionment is still equally weighted 3-factor and the use of heavier weighting of the sales factor is an election, this repeal may have little impact on the North Dakota corporation income tax calculation. However, given that North Dakota did not repeal the entirety of the MTC, it is uncertain whether the repeal of the apportionment election is actually effective.

This new law is effective for tax years beginning after Dec. 31, 2014. 

Takeaways

The addition of an elective apportionment methodology creates a planning opportunity to determine which method is most advantageous for a client. The election for a more heavily weighted sales factor will likely be advantageous for a corporation with a lower North Dakota sales factor relative to their property and payroll factors. Alternatively, a corporation with a higher North Dakota sales factor relative to their property and payroll will likely benefit from continuing to use the 3-factor formula. Note, however, that pass-through entities will continue to apportion their income using equally weighted 3-factor apportionment formula. Therefore, the ultimate taxation of pass-through income received by corporate partners will depend on the apportionment formula elected by the corporate partner.

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