While Missouri legislators have debated broader tax reform packages, a narrower corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. reform bill, Senate Bill 674, flew largely under the radar. Until now, at least. Last Thursday, Senate Bill 674, introduced by Senator Andrew Koenig (R), passed the state senate overwhelmingly, on a bipartisan vote of 28-4.
For a bill which cuts the corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate from 6.25 to 3.5 percent, that’s an impressive showing. The bill picked up steam rapidly as negotiations on other tax legislation slowed, and the deal it embodies – changing the state’s apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formula and using the resulting revenue to pay down corporate rate reductions – won wide support.
When corporations operate in multiple states, it is necessary for tax purposes to “apportion” their income among the states in which they do business. To this end, states have adopted a variety of apportionment methods, using some portion or combination of in-state sales, property, and payroll to determine what percentage of a company’s income should be subject to a given state’s income tax.
In 2013 (with clarifications in 2015), Missouri joined a growing list of states with single sales factor apportionment, meaning that income would be apportioned to Missouri exclusively based on the percentage of sales made in-state. But unlike many of its peers, Missouri made this apportionment method optional. If they prefer, companies can continue to utilize evenly-weighted three-factor apportionment, in which sales, property, and payroll are all taken into account.
Single sales factor apportionment tends to benefit in-state businesses with multistate (or even international) sales, while taxing out-of-state businesses which sell into the state, which helps explain how it has come into vogue. Three-factor apportionment, however, may offer more favorable treatment to companies without facilities or personnel in the state, or which disproportionately sell in-state.
There are arguments in favor of both approaches to apportionment, and to others. Giving businesses the choice of the more favorable of the two major apportionment formulas, however, is unusual and – for the state – costly.
Senator Koenig’s legislation eliminates the choice between the two apportionment factors, making single sales factor the state’s primary approach to apportionment. It then uses the anticipated revenue to reduce the corporate rate all the way to 3.5 percent on a roughly revenue-neutral basis, which would be the second-lowest rate in the country after North Carolina, at 3 percent.
And Missouri doesn’t have a capital stock tax, like North Carolina, so Missouri would edge out North Carolina on the corporate tax component of our State Business Tax Climate Index, a measure of tax structure. Only the two states which forgo both a corporate income tax and a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. (South Dakota and Wyoming) would continue to score better on that component.
Both chambers in Missouri are still considering broader tax reform bills which make additional changes, like phasing out the deductibility of federal taxes paid and cutting individual income taxes. Whether it stands alone or possibly serves as a component of a larger tax reform bill, SB 674 would help Missouri stand out.
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