June 27, 2014

Rhode Island Budget Bill Reduces Corporate Income Tax Rate, Repeals Franchise Tax, and Requires Combined Reporting Among Other Changes

Rhode Island Budget Bill Reduces Corporate Income Tax Rate, Repeals Franchise Tax, and Requires Combined Reporting Among Other Changes Tax & Business

On June 19, Rhode Island Governor Lincoln Chafee signed the state’s fiscal year 2015 budget bill. The bill enacts sweeping changes to the RI tax landscape across a number of taxes. The most significant changes will be to the corporate income tax but changes were also made that affect personal income, sales and use taxes and estate tax.

Corporate Income Tax
Effective for tax years beginning on or after January 1, 2015 the corporate tax rate will be reduced from 9% to 7% of net income.  In addition, each company that is part of a unitary business will be required to file a combined return and apply a single sales factor apportionment formula.

An affiliated group of C corporations may elect to be treated as a combined group with respect to the combined reporting requirement for the taxable year in lieu of a unitary business group. Members of a combined group must exclude as a member and disregard the income and apportionment factors of any corporation not incorporated in the United States if the sales factors outside the United States are 80% or more. Taxpayers required to file a combined report in a tax year beginning on or after January 1, 2015 must compute estimated payments for that tax year as follows: the installments must equal 100% of the tax due for the prior year plus any additional tax due to the combined report; or the installments must equal 100% of the current year tax liability.  As part of this legislative change the requirement for corporations to add back related party interest in determining Rhode Island net income has been eliminated.  Finally, S-corporations will also be subject to the minimum excise of $500 effective for tax years beginning on or after January 1, 2015.

Applicable to tax years beginning January 1, 2015, the Division of Taxation must establish an independent appeals process to attempt to resolve disputes between the Tax Administrator and the taxpayer with respect to the method of allocation applied. The decision resulting from the independent appeals process does not prohibit either party from pursuing any legal remedy otherwise available if the issue is not resolved as a result of the appeal process.

Personal Income Tax
When reporting the amount of use tax obligation on the personal income tax return, the taxpayer must list either the actual amount (from books, records, and other sources) or an amount using a lookup table established by the Tax Administrator. To determine the amount of use tax from the lookup table, the taxpayer must multiply 0.0008 by the amount of the taxpayer’s federal adjusted gross income as listed on the Rhode Island personal income tax return before modifications, adjustments, or other changes. If a taxpayer uses the lookup table, the taxpayer must list on the return not only the result from the lookup table, but also the actual amount of each single purchase whose purchase price equals or exceeds $1,000. When completing and filing a personal income tax return, the taxpayer must check a box attesting to the amount of use tax listed on the return.

Franchise Tax
Applicable to tax years beginning January 1, 2015, the franchise tax is repealed. Previously, the franchise tax rate was $2.50 for each $10,000 or fraction thereof of the corporation’s authorized capital stock.

Sales and Use Tax
Any person who knowingly sells, purchases, installs, transfers, or possesses an automated sales suppression device or phantom-ware is guilty of a felony and upon conviction, is subject to a fine not exceeding $50,000 or imprisonment not exceeding five years, or both. In addition, such person is liable to the state for all taxes, interest, and penalties due as the result of the person’s use of an automated sales suppression device or phantom-ware; and all profits associated with the person’s sale of an automated sales suppression device or phantom-ware. An “automated sales suppression device” (also known as a zapper) means a software program, carried on a memory stick or removable compact disc, accessed through an Internet link, or accessed through any other means, that falsifies transaction data, transaction reports, or any other electronic records of electronic cash registers and other point-of-sales systems. “Phantom-ware” means a hidden programming option, whether preinstalled or installed at a later time, embedded in the operating system of an electronic cash register or hardwired into the electronic cash register that can be used to create a virtual second till; or may eliminate or manipulate transaction records. A safe harbor is provided for any person who, by October 1, 2014: notifies the Division of Taxation of the person’s possession of an automated sales suppression device; provides any information requested by the Division of Taxation, including transaction records, software specifications, encryption keys, passwords, and other data; and corrects any underreported sales tax records and fully pays the Division of Taxation any amounts previously owed.

Real Estate Conveyance Tax
The real estate conveyance tax is increased from $2 per $500 of value to $2.30 per $500 of value.

Registration of Motor Vehicles
On or before October 31 in each year and at least quarterly thereafter, the Tax Administrator must furnish the Division of Motor Vehicles with a list of the names, addresses and social security numbers of persons who have neglected or refused to file a tax return and/ or to pay any tax administered by the Tax Administrator. These would be taxes for which no administrative or appellate review is pending regarding such tax matters. The administrator of the Division of Motor Vehicles cannot register any motor vehicle or transfer the registration of any motor vehicle for any person whose name appears on a list provided by the Tax Administrator until all state taxes, interest and penalties have been paid in full and the payment has been certified to the division of motor vehicles by the Tax Administrator. If the taxpayer thereafter files an overdue return and/ or remits past taxes due or enters into a satisfactory payment agreement with respect to any and all returns due and taxes payable, the Tax Administrator must within five business days of the taxpayer’s request, provide the Division of Motor Vehicles with a certificate of good standing. Within five days of receiving such certificate, the Division of Motor Vehicles must register or transfer the person’s registration.

Estate Tax
For decedents whose death occur on or after January 1, 2010 and prior to January 1, 2015, the death tax on the net estate of a decedent is imposed only if the net taxable estate exceeds $850,000. For decedents whose death occurs on or after January 1, 2015, the tax is the sum equal to the federal maximum credit for state death taxes, as it was in effect as of January 1, 2001; provided, however, that a Rhode Island credit is allowed against any tax so determined in the amount of $64,400. Any scheduled increase in the federal unified credit in effect on January 1, 2003, or thereafter, will not apply; provided, further, beginning on January 1, 2016 and each January 1 thereafter, the Rhode Island credit amount will be adjusted by the percentage of increase in the Consumer Price Index for all Urban Consumers (CPI-U) as published by the U.S. Department of Labor Statistics determined as of September 30 of the prior calendar year; such adjustment must be compounded annually and must be rounded up to the nearest $5 increment.

The end result of all these changes will prove to be significant changes in the taxes due from Rhode Island taxpayer.  If history in other states that have adopted unitary taxation is any indication, those companies that are based in Rhode Island will see an overall reduction in their effective tax rates and those companies for which Rhode Island is only a small part of their business operation will see an increase in their effective tax rates.  This results from the state no longer being limited to only measuring its tax based on entities with nexus to Rhode Island but now being able to apply that reach to all entities in a unitary business.  As is always the case, the regulations that will need to be issued on these laws will need to be reviewed in detail.  It is expected that the regulations will impose an interest add back for any related parties that are not part of the unitary group due to foreign ownership or other factors and will also impose a very generous interpretation of a “unitary business”. 

Should you have any questions related to the new RI laws or how they may affect you or your business, please contact your Marcum Tax Advisor.

A special thanks to article contributor Paul Graney, Director, Tax & Business Services.

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