Montana's corporate income tax 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% instead of the regular rate of 6.75%.

Although 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, because 2020 is a leap year, a corporation wishing to make a new water's-edge election or renew an existing election applicable to the 2020 tax year must file a Form WE-ELECT by March 30, 2020.

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 United States 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 federal 80%-ownership test. Other affiliated corporations that may be included are domestic international sales corporations (DISCs) and foreign sales corporations (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, the 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 Montana Department of Revenue (Department). Taxpayers choosing to continue the election for an additional three-year period must file the Form WE-ELECT within 90 days of the beginning of the new three-year period for which the election is intended to be effective. After an election request is filed, the Department will send a letter confirming that the election has been approved or explaining why it was denied. The Department 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, it is normally recommended that the taxpayer contact the Department to ascertain whether there is a problem with the request. The Department's response time may be delayed due to COVID-19.

Implications

The Montana water's-edge election procedure is one of the most unique and missed state elections. There have been no pronouncements to date extending this deadline due to COVID-19. Accordingly, taxpayers intending to make a water's-edge election for calendar year 2020 should take care to file the election by the statutory deadline.

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ENDNOTES

¹ Mont. Code Section 15-31-322(f) defines a "tax haven" to include the countries or territories of 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.