On April 20, North Dakota Governor Jack Dalrymple signed legislation allowing taxpayers to elect to apportion their income to North Dakota based on an apportionment method which phases in the use of the single sales factor.1 Taxpayers who choose not to make the election will be required to continue to apportion their income to North Dakota based on the equally-weighted three-factor apportionment formula, including the requirement to throwback sales and the use of the cost of performance method to calculate the sales factor for services. In addition, the legislation makes several changes to the state's adopted version of the Multistate Tax Compact, including elimination of the historic provisions contained in the Uniform Division of Income for Tax Purposes Act (UDITPA).

Adoption of Single Sales Factor Election

As provided in the legislation, North Dakota is phasing in the allowance of a single sales factor apportionment formula for purposes of computing its income tax. The law provides the following schedule for the phase-in election:

  • Tax Years 2016 and 2017 – Sales – 50 percent, Property – 25 percent, and Payroll – 25 percent;
  • Tax Year 2018 – Sales – 75 percent, Property – 12½ percent, and Payroll – 12½ percent; and
  • Tax Year 2019 and following years – Sales – 100 percent.2

The law provides that the election to use these special apportionment provisions must be made on the original income tax return for that year, provided that the return is timely filed.3 The election is binding on all members of the unitary group and for all companies filing a consolidated North Dakota return.4 Once the election is made, it is binding for the following five tax years.5 A taxpayer then may make a new election to use the sales-only apportionment formula in the tax year immediately following the final year of the prior election.6 If a taxpayer fails to renew the election to use single sales factor apportionment, the taxpayer will be required to use the equally-weighted three-factor apportionment formula consisting of property, payroll, and sales for the following three tax years.7 Further, pass-through entities and individuals are not allowed to make the election to phase-in the use of the single sales factor apportionment method.8

Multistate Tax Compact Changes

North Dakota amended its adoption of the Multistate Tax Compact by repealing the following three articles of the Compact:

Article III (Elements of Income Tax Laws) – which had allowed taxpayers to elect to apportion their income under either the provisions of North Dakota law or under the provisions of the equally-weighted three-factor apportionment formula provided in Article IV of the Compact.9

Article IV (Division of Income) – which contained the apportionment provisions from UDITPA.10 These provisions provided for the use of the equally-weighted three-factor apportionment formula including the use of the cost of performance for the calculation of the sales factor for services. It should be noted that despite this repeal, the regular apportionment formula required under North Dakota law is, and continues to be, the use of the equally-weighted three-factor apportionment formula including the use of the cost of performance method to determine the sales factor for services.

Article IX (Arbitration) – relating to arbitration of disputes concerning apportionment.11

Commentary

The decision to allow taxpayers to make an election to phase-in the use of the single sales factor for apportionment purposes represents a major policy change by North Dakota. Based on the fiscal note that was provided by the Office of the Tax Commissioner, the provisions of the legislation are estimated to reduce general fund revenues by $15 million during the 2015 and 2016 biennium, and ultimately increase to $120 million during the 2019 and 2020 biennium.

Since the election to use single sales is binding for a five-year period, taxpayers will need to carefully consider their income projections and the expected location of the activities that will generate their income. The election to use the phased-in single sales factor still includes the requirement to apply the historic UDITPA throwback provision, along with the cost of performance rules to determine how to source sales of items other than tangible personal property.

The legal impact of the changes that were made to North Dakota's adoption of the Compact remain to be seen. As long as the option for taxpayers to use the equallyweighted three-factor apportionment formula remains in place, taxpayers are unlikely to challenge the North Dakota legislature's ability to repeal selected articles of the Compact without first repealing and then reenacting the Compact.

Footnotes

1 S.B. 2292, Laws 2015.

2 N.D. CENT. CODE §§ 57-38.1-09.2; 57-38.1-09.3; 57-38.1-09.4.

3 N.D. CENT. CODE §§ 57-38.1-09.2(a); 57-38.1-09.3(a); 57-38.1-09.4(a).

4 N.D. CENT. CODE §§ 57-38.1-09.2(b); 57-38.1-09.3(b); 57-38.1-09.4(b).

5 N.D. CENT. CODE §§ 57-38.1-09.2(c); 57-38.1-09.3(c); 57-38.1-09.4(c).

6 N.D. CENT. CODE §§ 57-38.1-09.2(d); 57-38.1-09.3(d); 57-38.1-09.4(d).

7 Id.

8 N.D. CENT. CODE §§ 57-38.1-09.2; 57-38.1-09.3; 57-38.1-09.4.

9 N.D. CENT. CODE § 57-59-01, Art. III (repealed).

10 N.D. CENT. CODE § 57-59-01, Art. IV (repealed).

11 N.D. CENT. CODE § 57-59-01, Art. IX (repealed).

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.