United States: Rhode Island Adopts Combined Reporting, Single Sales Factor Apportionment And Market-Based Sourcing

Rhode Island Governor Lincoln Chafee signed budget legislation June 19 enacting various tax provisions, including the adoption of unitary combined reporting, a single sales factor for corporate income tax apportionment purposes, and market-based sourcing of sales of items other than tangible personal property.1 The legislation also reduces the corporate income tax rate, repeals the franchise tax, eliminates the captive real estate investment trust (REIT) and related-party addback provisions, and modifies various sales tax provisions.

Income Tax Rate

For years beginning on or after January 1, 2015, the corporate income tax rate is reduced from 9 percent of net income to 7 percent of net income.2

Unitary Combined Reporting

For years beginning on or after January 1, 2015, Rhode Island will require C corporations which are part of a unitary business to file a combined return.3 Previously, separate company reports were required4 unless an affiliated group of corporations which met certain requirements elected to file on a post-apportionment consolidated basis.5 Alternatively, an affiliated group of C corporations (as defined by Internal Revenue Code (IRC) Section 1504) may now elect to be treated as a combined group if all C corporations included in the affiliated group consent to such election, which may be made by simply filing a consolidated return for the combined group. The election must remain in place for at least five years unless an exception is granted by the tax administrator.6 Despite the combined filing requirement, each taxpayer member remains responsible for paying tax based on its apportioned taxable income or loss.7 Estimated payment provisions were also included in the legislation. To avoid incurring interest and penalties as a result of the transition to combined reporting, estimated payments for combined return filers should be based on either the full amount of tax due for the prior year plus any additional tax due to the combined reporting provisions or the full amount of the current year liability.8

Non-U.S. corporations are excluded from the combined group if their sales factors outside the U.S. are at least 80 percent (commonly described as 80/20 companies). Furthermore, income of non-U.S. corporations subject to provisions of a federal income tax treaty, as well as related expenses and apportionment factors, is disregarded for income tax purposes.9 An exception from this rule is available if the tax administrator determines that, in the case of a non-U.S. corporation organized in a tax haven country that has a federal income tax treaty with the U.S., the transactions conducted between the non-U.S. corporation and other members of the combined group are done on an arm's length basis and not with the principal purpose to avoid taxes or the member establishes that the inclusion of such net income in combined group net income is unreasonable.10

The legislation requires the tax administrator from the Rhode Island Division of Taxation to prescribe rules and regulations as necessary with respect to the determination of tax liability under combined reporting.11 Also, the tax administrator is required to submit a report to leaders of relevant state legislative committees by March 15, 2018 analyzing policy and fiscal ramifications of the corporate tax changes contained in this legislation, based upon the first two years of filings made by corporations pursuant to these changes.12

Combined groups are eligible for the corporate income tax rate reductions available under the Jobs Development Act13 for eligible companies, and the I-195 Redevelopment Act as applied to life sciences companies.14 The tax rate reductions have been adjusted in light of the general decrease in the corporate income tax rate described above. For purposes of the Jobs Development Act, the available tax rate reduction limit for eligible companies has been reduced from 6 percent to 4 percent.15 As for life sciences companies, the available tax rate reduction limit has been increased from 3 percent to 6 percent for the 2012, 2013 and 2014 tax years, and is decreased to 4 percent for tax years beginning on or after January 1, 2015.16

Net Operating Losses and Credits

As companies transition to combined reporting, a tracing protocol will apply to net operating losses (NOLs) created before January 1, 2015.17 These NOLs may not be shared with other members of the combined group, but will only be allowed to offset the income of the corporation that created such losses. NOLs created beginning in 2015 will be treated as those under IRC Section 172 and may be applied against other group members' liabilities, except that they will be adjusted to reflect the inclusions and exclusions from net income required for Rhode Island purposes. NOLs may not be carried back, and will have a five-year carryforward period.18

Similarly, tax credits earned in years prior to January 1, 2015 may not be shared with other members of the combined group, but will only be allowed to offset the income of the corporation that created them.19 Credits earned in later years may be shared with unitary group members.20

Single Sales Factor Apportionment

Historically, taxpayers deriving income from sources both within and outside Rhode Island have apportioned their income to Rhode Island based on an equally-weighted three-factor (property, payroll and sales) apportionment formula, sourcing sales of services via a pro rata cost of performance rule.21 For tax periods beginning on or after January 1, 2015, taxpayers will apportion their income based on a single sales factor.22 As for the sourcing rules applicable to specific types of sales, several of the sourcing rules other than the rule applicable to sales of services will remain the same. Receipts attributable to Rhode Island include receipts from sales of tangible personal property where shipments are made to points in Rhode Island, shipments from a business location in Rhode Island if the taxpayer is not taxable in the state of purchase (throwback rule), and gross income from rentals of property in Rhode Island.23 Rhode Island receipts includable in the numerator of the sales factor also include net income from the sale of real and personal property (excluding inventory) or other capital assets located in Rhode Island,24 net income from the sale or disposition of securities or financial obligations,25 and gross income from all other receipts within Rhode Island.26

The two changes to the historic Rhode Island sourcing rules are significant. Gross income from the performance of services will be sourced to Rhode Island to the extent the recipient receives benefit of the service in Rhode Island.27 Further, intercompany receipts are generally eliminated in computing the receipts factor and each unitary group member must include all of its Rhode Island receipts in the numerator of the sales factor, regardless of its individual nexus position (i.e., Finnigan approach to the sales factor).28

Sales and Use Tax

An exemption from sales and use tax that has been in place since December 1, 2013 is extended for sales of alcoholic beverages, excluding beer, by certain licensed sellers until June 30, 2015.29 Sales of these items are also not subject to the minimum markup during this period.30 Excise taxes applicable to certain alcoholic beverages are reduced as of July 1, 2014.31

Independent Appeals Process

An independent appeals process must be established by the Division to facilitate dispute resolution between the tax administrator and taxpayers with respect to the method of allocation applied for corporate income tax purposes. A decision rendered as a result of this process will not preclude either party from pursuing an otherwise available legal remedy. However, the decision arising from the dispute resolution process can be used as evidence.32

Other Changes

Other tax provisions enacted by the legislation include:

  • Specification that a minimum tax (currently $500) applies to S corporations for tax years beginning on or after January 1, 2015;33
  • A change in how use tax is reported on personal income tax returns. Beginning July 1, 2014, taxpayers can use a lookup table based on federal adjusted gross income to determine a "safe harbor" amount of use tax payable, in lieu of reporting an exact amount. Single purchases costing greater than $1,000 must still be reported separately;34
  • A change in the tax on the net estate of decedents whose death occurs on or after January 1, 2015. For such taxpayers, an estate tax will apply in the amount of the federal maximum credit for state death taxes as was in effect as of January 1, 2001. A Rhode Island credit of up to $64,400 is allowed against the tax. The maximum credit amount will be adjusted annually;35
  • A requirement that the tax administrator notify any public employee not in compliance with state income tax laws annually beginning by December 1, 2014. Such employees may be subject to wage garnishment;36
  • A requirement that the tax administrator report delinquent taxpayers to the Division of Motor Vehicles on at least a quarterly basis beginning by October 31 in each year. Based upon this information, motor vehicle registration or transfer of registration may be denied for delinquent filers;37
  • Modification of the available state earned income credit amount. The amount by which the credit exceeded the tax is now fully refundable (previously, only 15 percent of the amount by which the credit exceeded the tax was refundable), but the amount of the credit is decreased from 25 percent to 10 percent of the federal amount;38 and
  • An increase in the property transfer tax from $2.00 to $2.30 per $500 of value transferred.39


The decision by Rhode Island to adopt unitary combined reporting continues a trend among states that generally have tried to focus on intercompany transactions as a means to ensure that income was properly being reflected to each jurisdiction, either by statutory or regulatory means. By adopting a unitary combined reporting approach to corporate income taxation, Rhode Island joins a host of other states in viewing a group of related entities as a whole rather than as separate parts.

Similarly, Rhode Island's adoption of a single sales factor and market-based sourcing for sales of services follow current trends in multistate taxation. The adoption of a "benefits received" test rather than the "services delivered" or a "bill-to" test could make it more difficult for taxpayers to determine exactly where their customer base is located, making sourcing determinations more challenging.

While the decrease in the corporate income tax rate is a clear business-friendly provision included in the Rhode Island budget legislation and will make the state more competitive from a tax rate comparison perspective, the decrease was driven primarily to keep the shift to combined reporting relatively tax-neutral from a revenue perspective. Whether such reduction will fully account for the other changes made to the corporate income tax will be closely analyzed in the coming years by the Division.

Rhode Island's corresponding repeal of its related-party addback rules is interesting.40 While the rules would have been rendered moot for related entities engaged in a unitary business filing on a combined basis in many instances, they would have retained limited application. Certain taxpayers who would have previously had to add back certain payments to related parties could potentially benefit from this repeal.

With the adoption of an independent tax resolution procedure to address apportionment and allocation disputes required by statute, Rhode Island has broken ground among its peers. While Rhode Island has not developed a full-blown independent tax tribunal, if the appeals process can help taxpayers reach reasonable agreements with the Division regarding alternative apportionment methods, it could prove indispensable and a model for other states. This approach is particularly relevant in reducing the number of instances in which taxpayers are effectively double-taxed by states using different business / nonbusiness income standards or sales factor sourcing approaches.


1 H.B. 7133, Laws 2014.

2 R.I. GEN. LAWS § 44-11-2.

3 R.I. GEN. LAWS § 44-11-4.1(a).

4 R.I. GEN. LAWS § 44-11-1.

5 R.I. GEN. LAWS § 44-11-4; R.I. CODE R. CT 88-7. An affiliated group of corporations could elect to file a consolidated Rhode Island return if each corporation included in the return: (1) consented to the filing of a state consolidated return; (2) was not a foreign sales corporation (FSC), domestic international sales corporation (DISC), S corporation or corporation engaged in buying, selling, dealing in or holding securities on its own behalf; (3) was subject to Rhode Island tax; (4) had the same fiscal period; and (5) was affiliated at any time during the taxable year.

6 R.I. GEN. LAWS § 44-11-4.1(b).

7 R.I. GEN. LAWS § 44-11-4.1(c).

8 R.I. GEN. LAWS § 44-26-2.1(m).

9 R.I. GEN. LAWS § 44-11-4.1(d).

10 Id.

11 R.I. GEN. LAWS § 44-11-4.1(g).

12 R.I. GEN. LAWS § 44-11-4.1(h).

13 R.I. GEN. LAWS § 42-64.5-3.

14 R I. GEN. LAWS § 42-64.14-10.

15 R.I. GEN. LAWS § 42-64.5-4(a)(i), (ii).

16 R.I. GEN. LAWS § 42-64.14-11(a), (b).

17 R.I. GEN. LAWS § 44-11-4.1(e).

18 R.I. GEN. LAWS § 44-11-4.1(e)(3).

19 R.I. GEN. LAWS § 44-11-4.1(f)(1).

20 Id.

21 See generally R.I. GEN. LAWS § 44-11-14(a).

22 R.I. GEN. LAWS § 44-11-14(b).

23 R.I. GEN. LAWS § 44-11-14(b)(1)(i), (iii).

24 R.I. GEN. LAWS § 44-11-14(b)(1)(iv).

25 R.I. GEN. LAWS § 44-11-14(b)(1)(v).

26 R.I. GEN. LAWS § 44-11-14(b)(1)(vi).

27 R.I. GEN. LAWS § 44-11-14(b)(1)(ii).

28 R.I. GEN. LAWS § 44-11-14(b)(1)(vii).

29 R.I. GEN. LAWS § 44-18-30(64). Previously, the exemption was scheduled to expire on March 31, 2015.

30 Id.

31 R.I. GEN. LAWS § 3-10-1.

32 R.I. GEN. LAWS § 44-11-15.

33 R.I. GEN. LAWS § 44-11-2(d)(1), (e).

34 R.I. GEN. LAWS § 44-30-100.

35 R.I. GEN. LAWS § 44-22-1.1(a)(4). For decedents whose deaths occur between January 1, 2010

and January 1, 2015, an estate tax is applied to net taxable estates exceeding $850,000.

36 R.I. GEN. LAWS §§ 44-69-1; 44-69-3.

37 R.I. GEN. LAWS § 31-3-6.1.1.

38 R.I. GEN. LAWS § 44-30-2.6(c)(2)(N)(1), (2).

39 R.I. GEN. LAWS § 44-25-1.

40 The related-party addback rules are currently contained in R.I. GEN. LAWS § 44-11-11(e)-(i).

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