The District of Columbia has enacted legislation, the Fiscal Year 2014 Budget Support Emergency Act of 2013, which includes provisions that clarify the combined reporting statutes that are effective for tax years beginning after December 31, 2010.1 Also, the budget legislation repeals two articles of the Multistate Tax Compact concerning apportionment, reduces the sales tax rate, provides a sales tax exemption for utilities used by restaurants and adds a new method for determining the motor vehicle fuel tax rate. This legislation is effective July 30, 2013 for a 90-day period that expires on October 28, 2013, but is expected to become permanently effective in the coming months.
Combined Reporting
In 2011, the District of Columbia enacted legislation requiring taxpayers engaged in a unitary business with one or more corporations that are part of a water's-edge combined group to file a combined report for tax years beginning after December 31, 2010.2 On September 14, 2012, the District of Columbia Office of Tax and Revenue (OTR) promulgated regulations to clarify the mandatory combined reporting statutes.3 The combined reporting statutes were subsequently amended by emergency legislation in October 2012 and temporary legislation in November 20124 to codify many of the changes contained in the regulations and to further clarify the combined reporting requirements. This previously enacted clarifying legislation transferred enforcement of the combined reporting requirements from the Mayor to the Chief Financial Officer (CFO), and amended statutory provisions concerning key definitions, treatment of partnerships and other unincorporated business (UB) entities subject to the District Unincorporated Business Tax (UBT), composition of the water's-edge group, automatic extension of the worldwide election and the Financial Accounting Standard No. 109 (FAS 109) deduction.5 The recent budget legislation includes many of these temporary amendments but also contains further revisions. The most significant differences between the temporary clarifying legislation enacted in November 2012 and the budget legislation are discussed below. All of the amendments to the combined reporting provisions retroactively apply to taxable years beginning after December 31, 2010.
Definitions
As amended, "corporation" includes: (i) any corporation as defined by the District's laws or organization of any kind treated as a corporation for tax purposes under the District's laws, wherever located, which, were it doing business in the District, would be subject to the District's corporate income tax; and (ii) a joint-stock company, trust, association and S corporation or other organization that is taxable as a corporation under federal income tax law.6 The definition of "corporation" no longer includes the provision that the business conducted by a partnership directly or indirectly held by a corporation is considered the business of the corporation to the extent of the corporation's distributive share of the partnership income.
In lieu of the provision relating to a partnership being contained in the definition of "corporation," the budget legislation amends the definition of "doing business" to include the activity of a partnership.7 The definition of "person" is amended to exclude a qualified high technology company.8 In addition, the definition of "trade or business" is amended to include activities in the District that benefit a "related entity of the taxpayer" (previously, "affiliated entity of the taxpayer").9 This definition also is amended to include the leasing of property through "an agent, officer, or a representative" (previously, this only included property leased by an agent). Further, the definition of "unitary business" is amended by deleting the provision that any business conducted by a partnership is treated as conducted by its partners to the extent of the partner's distributive share of the partnership's income.10
Partnerships and Other UB Entities
The budget legislation eliminates several provisions concerning partnerships or other UB entities. For example, the legislation removes the provision added by last year's emergency and temporary legislation that for members owning interests in non-UB partnerships, the income or loss of the partnership is apportioned to the District using the apportionment factors of the partnership.11 Also, the budget legislation deletes the provision that the distributive share of the combined group member is added to the member's other income.12
The budget legislation also removes a section added by last year's emergency and temporary legislation providing that for combined group members that own UBs, the UB's income or loss is apportioned to the District using the UB's apportionment factors and the combined group member's distributive share is added to the member's income.13 Furthermore, the legislation deletes the provision that any distributive share that was actually taxed under the UBT is subtracted from the combined group member's income.14 These last two items are replaced by language providing that in the case of any person entitled to the distributive share of a trade or business net income, the CFO will adopt regulations to determine the methodology of including the distributive share but provide an exclusion for the portion of the distributive share that is reported by and taxed against any person under the District's corporate income statutes to prevent double taxation or double deduction.15 Finally, the legislation eliminates the provision that if a unitary business includes income from a partnership, the income to be included in the combined group's total income is the member of the combined group's direct and indirect distributive share of the partnership's unitary business income.16 The OTR is in the process of providing further guidance relating to how unitary groups with UBs should report their income and apportionment factors on the combined return.
Portions of Multistate Tax Compact Repealed
For tax years beginning after December 31, 2012, the legislation repeals the District's adoption of the Multistate Tax Compact and re-enacts the Compact except for Articles III and IV.17 Article IV of the Compact contains the Uniform Division of Income for Tax Purposes Act (UDITPA) which provides for the use of an equally-weighted three-factor apportionment formula and for the use of the cost of performance method in determining the sales factor for services. Article III provides taxpayers with the opportunity to elect to use the equally-weighted three-factor apportionment formula in lieu of state-specific apportionment. The District originally adopted the Compact in 1981.18
Sales and Use Tax
The budget legislation makes various changes to sales and use tax laws including a reduction in the general sales tax rate and the creation of an exemption for utilities used by restaurants.
Sales Tax Rate Reduced
Beginning on October 1, 2013, the current sales tax rate of 6 percent is reduced to 5.75 percent.19
Exemption for Utilities Used by Restaurants
Effective August 1, 2013, a sales tax exemption is provided for sales of natural or artificial gas, oil, electricity, solid fuel, or steam, directly used in a restaurant.20 For purposes of this exemption, a "restaurant" is a retail establishment that is licensed by the District, a separately metered or sub-metered facility, and in the principal business of preparing and serving food to the public.21 "Restaurant" includes a pizzeria, delicatessen, ice cream parlor, cafeteria, take-out counter, and caterer, and banquet and food-processing areas in hotels, but does not include beverage counters, including coffee shops and juice bars.22
Motor Vehicle Fuel Tax
Beginning October 1, 2013, the District's motor vehicle fuel tax will be imposed at a rate equal to 8 percent of the average wholesale price of a gallon of regular unleaded gasoline for the applicable base period, excluding federal and state taxes.23 The tax continues to be imposed on fuel sold or otherwise disposed of by an importer or by a user, or used for commercial purposes. The average wholesale price is calculated twice per year and the rate is adjusted effective April 1 and October 1 of each year. However, the average wholesale price used for this computation may not be less than $2.94 and may not vary by more than 10 percent from the average wholesale price for the prior period. Currently, the motor vehicle fuel tax is imposed at a rate of 23.5 cents per gallon.
Commentary
The District's adoption of mandatory combined reporting has been a major and complex change that has required administrative guidance from the OTR and statutory amendments to clarify the provisions. Many of the clarifications contained in the emergency and temporary legislation enacted last fall are included in this recent budget legislation. Because the budget legislation became effective on July 30 and provides the latest version of the combined reporting provisions, this is the version of the combined reporting statutes that currently is controlling. While this emergency budget legislation expires on October 28, 2013, the legislation is widely expected to be permanently enacted at some point in the future. It is important to note that this legislation deletes several provisions that were previously added to clarify the taxation of partnerships and other UB entities, although some of these provisions were moved to different definitional sections of the combined reporting law. The OTR is likely to promulgate regulations and potentially other guidance to clarify the taxation of these entities.
The repeal of Articles III and IV of the Multistate Tax Compact undoubtedly is due to high-profile litigation in California,24 Michigan25 and other Compact member states concerning the ability of a taxpayer to make an election to use a three-factor apportionment formula under these provisions of the Compact, instead of state-specific corporation income tax provisions. States such as California,26 Minnesota,27 Oregon,28 South Dakota29 and Utah30 also have enacted legislation repealing all or certain portions of the Compact. However, a state's ability to withdraw from portions of the Compact is unclear and this issue currently is pending before the California and Michigan Supreme Courts. Thus, it is uncertain at this point whether states can effectively insulate themselves from litigation concerning the three-factor apportionment election by repealing certain provisions of the Compact.
Footnotes
1 Act 20-130 (D.C.B. 20-337), Laws 2013. This is emergency budget legislation, but the Council of the District of Columbia passed permanent budget legislation, the Fiscal Year 2014 Budget Support Act of 2013 (D.C.B. 20-199), on June 26, 2013. This permanent budget legislation is awaiting the Mayor's approval.
2 D.C. CODE ANN. § 47-1805.02a.
3 D.C.MUN. REGS. tit 9, §§ 156 to 176. These new regulations are effective for taxable years beginning after December 31, 2010 and address several combined reporting issues including the composition of the combined group, worldwide reporting election, determination of taxable income or loss, computation of net operating losses, adoption of the Joyce rule for apportionment, treatment of partnerships, FAS 109 deduction and the automatic filing extension for the first combined return. For further information, see GT SALT Alert: District of Columbia Promulgates Corporate Income Tax Regulations to Clarify Mandatory Combined Reporting.
4 Act 19-537 (D.C.B. 19-947), approved by Mayor Vincent Gray on Nov. 16, 2012. This temporary legislation applies to taxable years beginning after December 31, 2010 and was effective March 19, 2013. The temporary legislation expires 225 days after it takes effect. This temporary legislation was virtually identical to emergency legislation, Act 19-482 (D.C.B. 19-946), approved by Mayor Vincent Gray on Oct. 12, 2012. This emergency legislation applies to taxable years beginning after December 31, 2010 and was effective on a temporary basis until January 10, 2013.
5 For further discussion of the provisions contained in the temporary legislation from November 2012, see GT SALT Alert: District of Columbia Enacts Temporary Legislation to Amend and Clarify Mandatory Combined Reporting.
6 D.C. CODE ANN. § 47-1801.04(10).
7 D.C. CODE ANN. § 47-1801.04(15).
8 D.C. CODE ANN. § 47-1801.04(39). "Qualified high technology company" is defined in D.C. CODE ANN. § 47-1817.01(5)(A).
9 D.C. CODE ANN. § 47-1801.04(53).
10 D.C. CODE ANN. § 47-1801.04(55). The deleted language also provided that a business conducted directly or indirectly by one person is unitary with that portion of a business conducted by another person through its direct or indirect interest in a partnership if there is a synergy and exchange and flow of value between the two parts of the business and the two persons are members of the same commonly controlled group.
11 Former D.C. CODE ANN. § 47-1810.04(c)(2).
12 Id.
13 Former D.C. CODE ANN. § 47-1810.05(a)(3).
14 Id.
15 D.C. CODE ANN. § 47-1810.05(a)(3).
16 Former D.C. CODE ANN. § 47-1810.05(b)(4).
17 D.C. CODE ANN. § 47-441.
18 Act 4-17, Laws 1981.
19 D.C. CODE ANN. § 47-2002(a).
20 D.C. CODE ANN. § 47-2005(11A)(A).
21 D.C. CODE ANN. § 47-2005(11A)(B).
22 Id.
23 D.C. CODE ANN. § 47-2301(a).
24 The Gillette Co. v. Franchise Tax Board, 147 Cal. Rptr. 3d 603 (Cal. Ct. App. 2012); petition for review granted, 291 P.3d 327 (Cal. 2013).
25 International Business Machines Corp. v. Department of Treasury, Michigan Court of Appeals, No. 306618, Nov. 20, 2012 (unpublished), leave to appeal granted, Michigan Supreme Court, No. 146440, July 3, 2013; Anheuser-Busch, Inc. v. Department of Treasury, Michigan Court of Claims, No. 11-85-MT, June 6, 2013.
26 Ch. 37 (S.B. 1015), Laws 2012.
27 Ch. 143 (H.F. 677), Laws 2013.
28 Ch. 407 (S.B. 307), Laws 2013.
29 S.B. 239, Laws 2013.
30 Ch. 462 (S.B. 247), Laws 2013.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
