In his final legislative action before resigning, former Missouri Governor Eric Greitens on June 1, 2018 signed into law Missouri S.B. 884, which addresses corporate income tax reform. S.B. 884 provides for the mandatory use of the single sales factor formula, a corporate income tax rate reduction from 6.25% to 4%, and the elimination of intercompany transactions between corporations that file a consolidated Missouri income tax return.

The Missouri Legislature also passed H.B. 2540, addressing individual income tax reform on May 17, 2018. That bill too was delivered to the Governor for signature on May 30, 2018 but was not signed. H.B. 2540 provides for a 5.5% individual income tax rate effective for tax years beginning on or after January 1, 2019, elimination of personal and dependent exemptions, and a phase out of the federal income tax deduction.

Former Governor Greitens did not act on H.B. 2540 before leaving office. The fate of H.B. 2540 is unclear. If newly sworn-in Governor Michael Parson does not sign or veto the bill, under Missouri's constitution, H.B. 2540 will be enrolled with the Secretary of State and become law. Since the legislature has adjourned, Governor Parson will have 45 days after presentment of the bill on May 30 to act on the measure.

Corporate income tax implications

Under Missouri S.B. 884, multi-state taxpayers, with the exception of those in unique industries such as transportation, financial services, etc., must use the single sales factor method of apportioning income for tax years beginning on or after January 1, 2020. The required single sales factor method sources sales of tangible personal property to Missouri if the final destination point is in the state and sources sales other than sales of tangible personal property to the state if the market is in the state. The sale, rental, lease or license of real or tangible property is in Missouri to the extent the property is in the state. Service revenue is sourced to Missouri if the ultimate beneficiary of the service is located in the state.

Before enactment of S.B. 884, multi-state taxpayers could elect to apportion business income to Missouri under a variety of elective methods: (1) an equally weighted three-factor apportionment formula; (2) the historic partly within / partly without single sales factor classification formula; and (3) the recently adopted optional single sales factor method (as passed in 2013 and modified in 2015) based on the final destination point for sales of tangible personal property and market based for sales other than the sale of tangible personal property. Missouri S.B. 884 eliminates the equally weighted three-factor apportionment method as well as the historic partly within / partly without single sales factor method.

Missouri S.B. 884 also reduced the corporate income tax rate to 4% for all tax years beginning on or after January 1, 2020. It retains the 50% federal income tax deduction and now requires all transactions between affiliated members of the affiliated group to be eliminated in a Missouri consolidated income tax return.

Individual income tax implications

If enacted, Missouri H.B. 2540 would reduce the individual income tax rate from 5.9% to 5.5% for tax years beginning on or after January 1, 2019. Further, if certain revenue triggers are met, the individual income tax rate could be reduced by an additional 0.4 percentage point over the next few years, a 0.1 percentage point reduction each time the revenue trigger is achieved. Missouri H.B. 2540 also would eliminate the personal and dependent deductions as these deductions were eliminated from the Internal Revenue Code.

Missouri H.B. 2540 would allow the business income deduction to increase in 5 percentage point increments each year the revenue trigger is achieved until it reaches a maximum of 20%.The maximum deduction currently is 25%. However, the offsetting rate reductions are expected to mitigate the impact of lowering the maximum deduction allowed.

Lastly, H.B. 2540 would phase out the federal income tax deduction for individuals. The percentage of federal income tax that would continue to be deductible for tax years beginning on or after January 1, 2019 would be based on the amount of Missouri adjusted gross income:

— $25,000 or less — 35%
— $25,001 to $50,000 — 25%
— $50,001 to $100,000 — 15%
— $100,001 to $125,000 — 5%
— $125,001 or more — no deduction is allowed

In addition, the federal income tax deduction may not exceed $5,000 for single taxpayer returns and $10,000 for joint returns, consistent with current law but for the new phase-outs described previously.

Implications

Corporate taxpayers should evaluate their existing Missouri apportionment elections and consider the mandatory use of the new market based single sales factor apportionment formula. In addition, S.B. 884 eliminates intercompany transactions within a Missouri consolidated income tax return, which contrasts with prior law under which intercompany transactions were uniquely not eliminated for apportionment purposes in Missouri consolidated returns.

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