Montana's corporate income tax law requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at a rate of 7.00% instead of the regular rate of 6.75%.

While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, a corporation wishing to make a new water's-edge election, or renew an existing election, that would be effective starting in the 2018 tax year must file a Form WE-ELECT with the Montana Department of Revenue (MT DOR) by March 31, 2018.

The election is only effective if all affiliated corporations subject to Montana taxes consent. Consent by the common parent of an affiliated group is deemed to be consent by all members of the group. A water's-edge group generally includes corporations organized in the US that have a unitary relationship and are eligible to be included in a federal consolidated return, except that a greater-than-50%-ownership test is substituted for the 80% federal ownership test. Other affiliated corporations that may be included are DISCs and FSCs, export trade corporations, foreign corporations that derive gain or loss from real property interests in the US, corporations incorporated outside the US that have more than 20% of their average payroll and property assignable to a location inside the US and corporations organized in a "tax haven."¹

As noted previously, the Montana Form WE-ELECT must be timely filed and, if approved, is binding for three years unless permission to change the filing methodology is obtained from the MT DOR. Elections to continue the election for an additional three years must be filed on the Montana Form WE-ELECT with the MT DOR within 90 days of the beginning of the new three-year period for which the election is intended to be effective. After an election is filed, the MT DOR will reply back with a letter confirming that the election has been approved or explaining why the election was denied. The MT DOR typically responds to these requests quickly. If a reply is not received within two weeks after submission or within two weeks before the deadline runs, the taxpayer should contact the MT DOR to ascertain whether there is a problem with the election request.

Implications

The Montana water's-edge election procedure is one of the most unique and missed state elections anywhere in the country. Taxpayers intending to make a water's-edge election for calendar year 2018 should take care to file the election by the statutory deadline.

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ENDNOTES

¹ Montana Code Section 15-31-322(f) provides that "tax haven" countries include Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu.