State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP

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1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Delaware Enacts Legislation Adopting Single Sales Factor Apportionment On January 27, 2016, Delaware Governor Jack Markell signed legislation, the Delaware Competes Act, which will gradually phase in single sales factor apportionment. 1 The sales factor will become more heavily weighted than the payroll and property factors for taxable periods beginning after December 31, Full implementation of the single sales factor apportionment will be completed in taxable periods beginning after December 31, The Act also amends various filing and payment provisions to ease compliance for small businesses. 2 The Act received strong bipartisan support, passing with near-unanimous approval and was sponsored by leaders of both the Democratic and Republican parties of the Delaware General Assembly. 3 Single Sales Factor Apportionment Currently, companies in Delaware use an equally-weighted three-factor apportionment formula. The phase-in of the single sales factor will occur as follows: For taxable periods beginning before January 1, 2017, an equally-weighted threefactor apportionment formula; For taxable periods beginning after December 31, 2016 and before January 1, 2018, a three-factor apportionment formula with a double-weighted sales factor; For taxable periods beginning after December 31, 2017 and before January 1, 2019, a three-factor apportionment formula with a triple-weighted sales factor; For taxable periods beginning after December 31, 2018 and before January 1, 2020, a three-factor apportionment formula with a sextuple-weighted sales factor; and For taxable periods beginning after December 31, 2019, a single sales factor apportionment formula. 4 Although still subject to the apportionment phase-in, special rules for computing the property and payroll factors apply for corporations that are classified in the legislation as non-u.s. corporations. A non-u.s. corporation is defined as a foreign corporation Release date February 9, 2016 States Delaware Issue/Topic Corporation Income Tax Contact details Matthew Melinson T E matthew.melinson@us.gt.com Vito Cosmo T E vito.cosmo@us.gt.com David Glad T E david.glad@us.gt.com Jamie C. Yesnowitz Washington, DC T E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T E chuck.jones@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 H.B. 235, Laws Press Release, Office of Delaware Governor Jack Markell, Jan. 27, 2016, available at 3 Id. 4 DEL. CODE ANN. tit. 30, 1903(b)(6)(i) (v)..

2 Grant Thornton LLP - 2 organized under the laws of a state other than the United States (or its states, territories or possessions) that is engaged in a trade or business in the United States. 5 The legislation specifies that a non-u.s. corporation s property located outside of Delaware, to be included in the property factor denominator, includes only property located within the United States. 6 Additionally, a non-u.s. corporation may only include in the payroll factor denominator compensation to employees, other than general executive officers, that is deductible under Internal Revenue Code (IRC) Sec The phase-in of the single sales factor does not apply to a narrowly defined class of taxpayers that are defined as telecommunications corporations or worldwide headquarters corporations. 8 Instead, for taxable periods beginning after December 31, 2016, these corporations may make an annual election to use either the three-factor apportionment formula or a single sales factor. 9 While many of the provisions do not immediately apply, the legislation states that these provisions take effect for taxable periods beginning after December 31, Estimated Tax Payments by Small Businesses For tax periods beginning after December 31, 2016, 11 the legislation revises provisions governing estimated tax payments, which historically have required accelerated payments to be made early in the tax year. Small corporations that are calendar-year corporations are now required to pay 25 percent of their estimated tax liability for the current taxable year with the tentative return filed on April 1, with the balance payable in three equal installments of 25 percent on June 15, September 15 and December Likewise, small corporations that are fiscal year corporations will be required to make estimated tax 5 DEL. CODE ANN. tit. 30, 1901(13). 6 DEL. CODE ANN. tit. 30, 1903(b)(6)a. 7 DEL. CODE ANN. tit. 30, 1903(b)(6)b. IRC 882 relates to the determination of federal taxable income that is effectively connected with the United States. 8 DEL. CODE ANN. tit. 30, 1903(b)(6). A telecommunications corporation is defined as a corporation that is a member of a group of corporate and non-corporate entities, which group (a) consists of corporate and non-corporate entities that are affiliated through relationships described in Section 267(b) of the Internal Revenue Code, (b) provides both intrastate mobile telecommunications services and other intrastate telephone services, as such terms are used in Section 5501(8)a.3. of this title, and (c) in the aggregate earns annual gross receipts in the United States from providing intrastate and interstate telephone and telecommunications services, and from providing Internet access, as such term is defined in Section 5501(6) of this title, in excess of fifty (50) billion dollars. DEL. CODE ANN. tit. 30, 1901(19). A worldwide headquarters corporation is defined as a corporation that: a. In its Form 10-Q filing with the Securities and Exchange Commission for the quarterly period immediately preceding the calendar quarter in which this act is effective, records as the site of its principal executive offices an address that is located within this State; b. As of January 1, 2016, employed at least 400 full-time employees within the structure or structures housing the corporation's headquarters located within this state; and c. Between July 1, 2014 and June 30, 2018, makes, or contracts with a real estate developer that makes, a capital investment of not less than $25 million to renovate and improve the structure or structures housing the corporation's headquarters located within this state. DEL. CODE ANN. tit. 30, 1901(21). 9 DEL. CODE ANN. tit. 30, 1903(b)(8). 10 H.B. 235, Id. 12 DEL. CODE ANN. tit. 30, 1905(1)(b).

3 Grant Thornton LLP - 3 payments in equal 25 percent installments due on the first day of the fourth month, the fifteenth day of the sixth month, the fifteenth day of the ninth month and the fifteenth day of the twelfth month of the current taxable year. 13 A small corporation is defined as any corporation, including an S corporation subject to Del. Code Ann. tit. 30, Sec. 1158, if such corporation (or any predecessor corporation) has aggregate gross receipts from sales of tangible personal property and gross income from other sources both within and outside Delaware for purposes of computing the sales factor that does not exceed the applicable threshold of $20 million for any two of the three taxable years immediately preceding the taxable year for which estimated tax is being computed. 14 This applicable threshold is subject to inflation adjustment. 15 Under current law, Del. Code Ann. tit. 30, Sec. 535(c)(4), dealing with penalties for underpayment of estimated tax installments, provides that no penalty is imposed if the total amount of all payments of estimated tax made on or before the last date set for the payment equals or exceeds the amount which would have been required to be paid on or before the date if the estimated tax was the tax shown on the final return of the taxpayer for the preceding taxable year. 16 The legislation amends state law to provide that this provision only applies in the case of a small corporation. 17 Business Tax Compliance Various provisions governing businesses have been amended to ease business tax compliance for Delaware employers, particularly smaller Delaware businesses. 18 Withholding of Tax The provisions governing the frequency for filing of a withholding return and payment of tax are amended by raising the thresholds as follows: lookback period that does not exceed $4,500 (previously $3,600) will be a quarterly filer; lookback period exceeds $4,500 (previously $3,600) but does not exceed $25,000 (previously $20,000) or which had no employees within Delaware during the lookback period will be a monthly filer; and lookback period exceeds $25,000 (previously $20,000) will be an eighth-monthly filer DEL. CODE ANN. tit. 30, 1905(2)(b). 14 DEL. CODE ANN. tit. 30, 1905(5). 15 Id. 16 DEL. CODE ANN. tit. 30, 535(c)(4). 17 DEL. CODE ANN. tit. 30, 535(c)(5). 18 H.B. 235, Legislative Synopsis. 19 DEL. CODE ANN. tit. 30, 1154(a).

4 Grant Thornton LLP - 4 The threshold amounts are subject to inflation adjustment. 20 These provisions are effective for withholding taxes deducted and withheld after December 31, Payment of License Fees Based on Gross Receipts Under current law, Delaware imposes license fees based on gross receipts attributed to certain activities. The returns and payments relating to these fees are due monthly but may be due quarterly if certain thresholds are met. The legislation raises the threshold for quarterly filing, thereby enabling hundreds of Delaware businesses to file quarterly instead of monthly, 22 under the following provisions: DEL. CODE ANN. tit. 30, Sec (Occupations Requiring Licenses): threshold raised from $750,000 to $1,500,000; 23 DEL. CODE ANN. tit. 30, Sec (Contractors License Requirements and Taxes): threshold raised from $750,000 to $1,500,000; 24 DEL. CODE ANN. tit. 30, Sec (Manufacturers License Requirements and Taxes): threshold raised from $300,000 to $1,500,000; 25 DEL. CODE ANN. tit. 30, Sec (Automobile Manufacturers): threshold raised from $300,000 to $1,500,000; 26 DEL. CODE ANN. tit. 30, Sec (Wholesaler License Requirements): threshold raised from $750,000 to $1,500,000; 27 DEL. CODE ANN. tit. 30, Sec (Retailer License Requirements): threshold raised from $500,000 to $1,500,000; 28 DEL. CODE ANN. tit. 30, Sec (Restaurant Retailer License Requirements): threshold raised from $500,000 to $1,500,000; 29 and DEL. CODE ANN. tit. 30, Sec (Grocery Supermarket Retailers): threshold raised from $750,000 to $1,500, These thresholds are subject to annual inflation adjustment 31 and are effective for returns reflecting gross receipts received after December 31, Annual Inflation Adjustment 20 Id. 21 H.B. 235, Press Release, Office of Delaware Governor Jack Markell, Jan. 27, DEL. CODE ANN. tit. 30, 2301(d)(2). 24 DEL. CODE ANN. tit. 30, 2502(c)(2). 25 DEL. CODE ANN. tit. 30, 2702(b)(3). 26 DEL. CODE ANN. tit. 30, 2703(c)(2). 27 DEL. CODE ANN. tit. 30, 2902(c)(2). 28 DEL. CODE ANN. tit. 30, 2905(b)(2). 29 DEL. CODE ANN. tit. 30, 2906(c)(2). 30 DEL. CODE ANN. tit. 30, 2908(c)(2). 31 DEL. CODE ANN. tit. 30, H.B. 235, 22.

5 Grant Thornton LLP - 5 Finally, the legislation provides that certain notification requirements, filing frequency and tax and tax credit thresholds will now be subject to an annual inflation adjustment. 33 Commentary The Delaware Competes Act received strong bipartisan support and, as a result, was able to move through the legislative process quickly. Unlike Connecticut s contentious and controversial budget bill, the legislation is generally business-friendly, particularly for small businesses. Delaware has now joined many other states in using a single sales factor apportionment formula. Very few states currently use an equally-weighted three-factor formula to apportion income to the state for corporate income tax purposes. According to a recent report, in 1978, 44 states used an equally-weighted three-factor apportionment formula and only one state used a single sales factor formula. 34 By 2014, the number of states using an equally-weighted three-factor apportionment formula dwindled to nine and the number of states using a single sales factor grew to Hopefully the legislation will accomplish one of the stated goals of making sure that companies don t pay more for decisions to hire and expand in the state. 36 Another key goal of the legislation was to ease business tax compliance for... smaller Delaware businesses. 37 One example of how the legislation attempts to accomplish this goal was with the amendments to the provisions governing estimated tax payments. While current law requires small businesses to make payments of 70 percent of their estimated total tax by June 1, which can be difficult given the revenue volatility small businesses often face, 38 the legislation allows small businesses to make equal quarterly payments. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed. 33 H.B. 235, 2; DEL. CODE ANN. tit. 30, 502 and Final Report of the DEFAC Advisory Council on Revenues, DEFAC Revenue Review Task Force (submitted May 2015). 35 Id. 36 Id. 37 H.B. 235, Legislative Synopsis. 38 Press Release, Office of Delaware Governor Jack Markell, Jan. 27, 2016.