Rhode Island recently enacted significant changes to corporate tax requirements that will affect large numbers of companies. Changes include updated guidance related to corporate nexus, combined reporting, single-sales-factor apportionment and market-based sourcing.
Here’s some of what’s new in the Rhode Island corporate tax code:
n Business Corporation Tax Corporate Nexus Regulation CT 15-02 provides enhanced guidance about which activities make a foreign corporate entity subject to Rhode Island income tax.
n Business Corporation Tax Apportionment of Net Income Regulation CT 15-04 makes changes to corporate tax reporting to mandate combined reporting, along the lines of the rules adopted for years 2009 and later by Massachusetts. The rules also mandate customer-based sourcing, similar to the market-based sourcing changes enacted by Massachusetts in 2015. Rhode Island’s adjustments, however, are more stringent than the changes adopted by Massachusetts.
The tax changes take effect for tax years on or after Jan. 1, 2015, and bring the most significant updates for multistate C corporations, which will now be required to use a single sales factor formula rather than the three-factor apportionment formula to determine their Rhode Island corporate tax liability. For sales of items other than tangible personal property, market sourcing is also required.
The guidance in CT 15-02 outlines which activities would make a foreign corporate entity subject to Rhode Island corporate tax. The guidance extends nexus considerations from where they were previously. As a result, additional corporations may find they are obligated to pay income tax in Rhode Island.
Nexus is the required connection between a business and the territory upon which a taxing authority can impose its jurisdiction. The burden of proof will fall on the foreign corporation to demonstrate if its physical presence in Rhode Island does not constitute nexus activity.
Foreign corporation representatives within the state or the foreign corporation’s controlling interest in a pass-through entity in Rhode Island also indicate nexus. Other economic nexus-creating activities are outlined in CT 15-02’s Rule 10(d).
Besides physical presence and economic presence, in-state activities such as repairing or maintaining property to be sold; collecting on accounts; issuing lines of credit or investigating creditworthiness of Rhode Island residents; installing property after delivery; and conducting training courses and providing technical assistance are all specifically considered nexus activities.
CT 15-02 includes several examples to help clarify the requirements as well as some of the major exceptions.
CT 15-04 requires C corporations to consolidate tax information related to their income tax liability and the information of their affiliates or other members of a combined group.
The combined-reporting requirement applies regardless of whether the other members of the combined group have a physical presence in Rhode Island. Pass-through businesses or partnerships held by C corporations must also be considered for income tax in Rhode Island to the extent that the C corporation has a share of the pass-through entity’s income.
Combined entities should adopt a uniform accounting period to reconcile any member of the combined group that has a different tax year than the entity filing with the state.
Next week the second part of this column will cover single-sales-factor appointment and market-based sourcing. •
Tarra Curran is a managing director in the tax group at CBIZ Tofias. She can be reached at TCurran@cbiztofias.com.
