Vermont Clarifies Corporate Income Tax Apportionment Rules

In 2019, Vermont passed legislation to change the method of sourcing services for corporate income tax purposes from a cost-of-performance methodology to market-based sourcing. This legislative change also included a change to a doubled-weighted sales factor in its three-factor apportionment formula.

Proposed amended regulation 1.5833, titled Allocation and Apportionment of Vermont Net Income by Corporations, provides details related to the application of the new market-based sourcing rules effective December 1, 2021. The enactment of H. 514 in June 2019 replaced the existing cost-of-performance rules with market-based sourcing for including sales other than sales of tangible personal property in the apportionment factor for purposes of corporate income tax. After requesting and considering public comments on the draft of the regulations, the Department of Taxes issued regulations to incorporate additional definitions to clarify the new rules, as well as incorporate some Multistate Tax Commission (MTC) suggestions to update outdated language. 

The updates include the following topics:

• The former equally weighted three-factor apportionment formula is changed to include double-weighted sales along with the property and payroll factors.
• Definitions of “trade or business” and “apportionable income” have been updated to reflect MTC suggested language.
• The relationship of the transactional test and the relationship test to the Constitution are discussed.
• Examples are provided to demonstrate the distinctions between apportionable and allocable income.
• Examples are provided to detail when a taxpayer is considered to be subject to tax in another state, for purposes of allowing apportionment of factors.
• The terms “business” and “nonbusiness,” as related to types of income, are replaced with “allocable” and “apportionable.”
• Taxpayers may petition for the use of alternative apportionment if it would more accurately assign income.
• The receipts from a sale of a service are in Vermont if, and to the extent that, the service is delivered to a location in Vermont. In general, the term “delivered to a location” refers to the location of the taxpayer’s market for the service.
• Many examples are used to provide treatment of services delivered electronically and through third parties, including licensing of intangible property.
• Apportionment guidelines for specific industries, such as trucking, broadcasting and some financial institutions, are discussed by the inclusion of examples.

Please contact Ryan to assist you in determining the impact of these changes on your business.

TECHNICAL INFORMATION CONTACTS:

Mark L. Nachbar
Principal
Ryan
331.998.7260
mark.nachbar@ryan.com

Mary Bernard
Manager
Ryan
401.272.3363
mary.bernard@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.