On January 29, 2018, Missouri Governor Eric Greitens released details of his proposed tax reform, which would reduce individual and corporate income tax rates but also end certain tax breaks. The governor's tax plan is being introduced as Senate Committee Substitute for SB 939 (hereafter, "SB 939"). In addition, it would eliminate the election to use the Multistate Tax Compact three-factor apportionment formula (Compact election), require the use of a single sales factor apportionment formula, implement market-based sourcing, and cause Missouri to join the Streamlined Sales and Use Tax Agreement (SSUTA), among others things.

A summary of these proposed changes follows.

Corporate income tax rate cut, other changes

For all tax years beginning on or after January 1, 2019, SB 939 would cut the corporate income tax rate to 4.25% (from 6.25%), and would prohibit corporations from deducting their federal tax liability paid. (Under current law, corporations can deduct 50% of their federal income tax liability in determining their Missouri tax liability.)

Allocation and apportionment changes

For tax years beginning on or after January 1, 2019, SB 939 would eliminate a corporation's ability to elect to use the three-factor apportionment formula under the Compact election and instead, require the use of a single sales factor apportionment formula. SB 939 would also modify current sourcing provisions by adopting a throwback rule for sales of tangible personal property¹ and impose market-based sourcing rules for sales of intangible property and services. These sourcing changes are similar to the model language issued by the Multistate Tax Commission.

SB 939 also would specify when certain income is allocable to Missouri, including income from net rents and royalties from real property located in the state and capital gains from the sale of this property, as well as patent and copyright royalties.

For certain industries with unusual fact patterns that produce inequitable results under the apportionment and allocation provisions, the Missouri Revenue Director (Director) would promulgate rules for determining the apportionment and allocation factors for each such industry.

Individual income tax rate cut, federal tax liability deduction phase-out

Under SB 939, for all tax years beginning on or after January 1, 2019, the top individual income tax rate would be reduced to 5.3% from 6%. (If SB 939 is not enacted, the top rate may eventually be reduced to 5.5% as various revenue triggers under current law are met.)

For individual taxpayers, Missouri's income tax deduction for federal tax liability (up to $5,000 for a single return, $10,000 for a combined return) would be modified by indexing the deduction amount to the taxpayer's Missouri adjusted gross income (MO AGI), and would be allowed as follows: (1) 100% for MO AGI of $25,000 or less; (2) 75% for MO AGI of $25,001 to $50,000; (3) 30% for MO AGI of $50,001 to $100,000; (4) 10% for MO AGI of $100,001 to $150,000. No deduction would be allowed for taxpayers with MO AGI of $150,001 or more.

Elimination of timely filing discounts for withholding and sales tax

SB 939 would eliminate an employers' ability to deduct and retain part of withholding taxes due, and sellers' ability to deduct and retain part of the sales tax due, when remitting taxes on or before the due date. This change would apply to all tax years beginning on or after January 1, 2019.

SSUTA, sales tax reporting requirements and miscellaneous items

SB 939 would direct the Missouri Department of Revenue (Department) to join the SSUTA, and would make various amendments necessary to bring the state's sales and use tax provisions into compliance with the SSUTA. SB 939 would require the Director to participate in an SSUTA online registration system that allows sellers to register in Missouri and other member states, obligating the seller to collect and remit sales and use taxes for all taxable sales into Missouri as well as other member states. SB 939, however, would provide that registration will not be used as a factor in determining nexus. Certified service providers would have to meet certain security and privacy requirements relating to purchasers' information. Uniform sourcing rules would apply for all Missouri purchases and generally would adhere to destination sales sourcing, with exceptions for retail sales of watercraft, modular homes, manufactured homes, mobile homes, and telecommunications services and ancillary services.

The Department would be required to provide and maintain downloadable electronic databases at no cost to the database users for taxing jurisdiction boundary changes, tax rates and a taxability matrix detailing taxable property and services. Sellers would be relieved of liability if they fail to properly collect tax based on certain information provided by the Department, and amnesty would be available in other situations.

Other sales and use tax changes would permit sellers to deduct bad debt from taxable sales, without interest; would establish provisions for various exemptions; and would amend provisions related to local sales tax to comply with the SSUTA. All provisions of SB 939 with respect to sales into the state by out-of-state sellers would also apply to for Compensating Use Tax Law.

Implications

The proposal is subject to debate and will likely be amended as it goes through the legislative process. Taxpayers should review the proposed changes and consider the potential impact the changes could have on their business, and consider whether reaching out to the administration or members of the state legislature would be worthwhile.

EY Missouri tax professionals will continue to monitor the progress of this proposal and will issue Tax Alerts as necessary.

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¹ See proposed Mo. Stat. Ann. Section 143.455(12)(3).