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Rhode Island Governor Dan McKee signed legislation (SB 3152/HB 7927) into law on June 24, 2024, that makes several tax changes related to the taxation of banking institutions. Notably, the law (1) allows banking institutions to elect to use a single receipts factor apportionment formula, (2) provides for the use of an alternative apportionment method in certain situations, and (3) requires the study of combined reporting for banking institutions. The "goal" of this legislation "is to create a more level playing field with Massachusetts … " Governor Dan McKee said when the bill was introduced.

Apportionment: single sales factor and alternative apportionment

Effective for tax years beginning on or after January 1, 2025, banking institutions subject to tax in multiple states may elect to apportion their Rhode Island net income using a single receipts factor. The receipts factor will be "computed according to the method of accounting (cash or accrual basis) used by the taxpayer for the taxable year." Taxpayers will make the election by filing a form prescribed by the tax administrator. The election will be effective in the tax year made and will be binding for subsequent years. Taxpayers may apply to revoke the election after five years if their facts or the law has materially changed.

For tax years beginning on or after January 1, 2025, the law requires an add back for certain related-party business expenses for a taxpayer that (1) elects to use single receipts factor apportionment and (2) would be included in a unitary group for corporate income tax purposes but for an exemption from the definition of corporation (e.g., specified banking, investment, and insurance companies). The statute establishes an exception to the add-back requirement when a taxpayer either shows by clear and convincing evidence that the disallowance is unreasonable or enters into an agreement with the tax administrator to apply an alternative apportionment method. In addition, the add-back adjustment will not be required when it results in duplicate taxation that violates the law.

For tax years beginning on or after January 1, 2025, the law modifies the alternative apportionment mechanism for banking institutions. Under the revised alternative apportionment provisions, either a taxpayer can apply to use, or the tax administrator may require the taxpayer to use, an alternative method of apportionment when the statutory apportionment method, including the electable single receipts factor, is not "reasonably adapted to approximate the net income derived from business carried on within the state."

Combined-reporting study

The law creates a combined-reporting study of banking institutions. Under this provision, banking institutions, as part of their tax returns filed for tax years beginning after December 31, 2023, but before January 1, 2026, must file reports as though they were included in a combined group. For the report, "each banking institution which is part of a unitary business must file a report … for the combined group containing the combined net income of the combined group"; the report must also include: (1) the difference in tax owed as a result of filing a combined report compared to the tax owed under the current filing requirements; (2) the volume of sales in the state and worldwide; and (3) the taxable income in the state and worldwide. The combined report will not include public service corporations; insurance companies; foreign banking institutions or foreign corporations whose average property, payroll and sales factors outside the United States is 80% or more. The combined report also will not include certain treaty-protected income or expenses or apportionment factors related to that income. Penalties, not to exceed $10,000, may apply for failure to timely file the report.

The tax administrator must submit a report based on the information provided in income tax returns and data submitted under the reporting requirement. The report must analyze the policy and fiscal ramifications of changing the bank excise tax statute to a combined method of reporting. The report is due to the chairs of the House and Senate finance committees and House and Senate fiscal advisors by March 15, 2027.

Implications

Multistate banking institutions should review these changes and determine whether it would be beneficial to elect to use a single receipts factor to apportion income to Rhode Island, keeping in mind that the election is binding for a minimum of five years.

Banking institutions also should review the reporting requirements associated with the combined-reporting study.