taxnews.ey.comPrint

07 May 2025

Kansas enacts single sales factor apportionment, market-based sourcing, and contingent corporate income tax rate reductions

  • Effective for tax years beginning on or after January 1, 2027, Kansas HB 2231 adopts single sales factor apportionment and market-based sourcing for sales of services and intangible property for purposes of the state's corporate income tax.
  • The law also provides for future corporate income tax rate reductions that are contingent on meeting specific revenue thresholds, with the first potential reduction after December 31, 2028.
  • Taxpayers should assess the impact of these changes on their Kansas tax obligations and file necessary statements by July 1, 2027, for the deferred tax impact deduction.
 

On April 24, 2025, Kansas Governor Laura Kelly signed into law HB 2231, which adopts single sales factor apportionment and market-based sourcing for sales of services and intangible property. The law also provides for future corporate income tax rate reductions that are contingent on revenue thresholds being met.

This Tax Alert does not discuss the individual income and property tax changes in HB 2231.

Single sales factor apportionment and the deferred tax impact deduction

Effective for tax years beginning on or after January 1, 2027, Kansas adopts a single sales factor apportionment formula for corporate income tax purposes, while financial institutions will use a single receipts factor. Qualified taxpayers that previously elected to use a property and sales factor apportionment formula under K.S.A. 79-3279(b)(2) may use the single sales factor apportionment formula.

The mileage-based apportionment formula used by railroads and interstate motor carriers is repealed for tax years beginning after 2026.

Manufacturers of alcoholic liquor who sell to distributors will continue to use an equally weighted three-factor (property, payroll and sales) apportionment formula.

Additionally, the law creates a deferred tax impact deduction1 that may be claimed by publicly traded companies on their relevant Kansas tax return2 if the imposition of the single sales factor apportionment requirements3 results in (1) an aggregate increase in the taxpayer's net deferred tax liability4 (DTL), (2) an aggregate decrease in its net deferred tax assets5 (DTA), or (3) causes its net DTA to become a net DTL. If the taxpayer is a unitary group required to file a combined reporting, the deferred tax impact deduction is calculated using unitary net DTAs or DTLs.

Taxpayers that plan to take the deferred tax impact deduction must file a statement with the Secretary of Revenue on or before July 1, 2027, specifying the total amount of the deferred tax impact deduction that they plan to claim. The deferred tax impact deduction is equal to the amount necessary to offset the increase, decrease or aggregate change to net DTAs or DTLs. The computation of the increase in net DTLs, decrease in net DTAs or the aggregate change from a net DTA to a net DTL is "based on the change that would result from the imposition of the single sales factor requirements pursuant to this section … as of the end of the tax year prior to tax year 2025." No adjustment to the deferred tax impact deduction will be permitted for events occurring after the deferred tax impact deduction is calculated. The deferred tax impact deduction is calculated without regard to any tax liabilities under the Internal Revenue Code nor does it alter the tax basis of any assets.

Eligible taxpayers may claim the deferred tax impact deduction in annual installments over a 10-year period, starting in 2035. The amount of the deferred tax impact deduction exceeding the taxpayer's liability will be carried forward until fully used.

Market-based sourcing

Effective for tax years beginning on or after January 1, 2027, Kansas replaces the costs of performance method for sourcing sales of non-tangible personal property, e.g., services and intangible, with the market-based sourcing method for purposes of the Kansas corporation income tax. (See K.S.A. 79-3287.) Although financial institutions will adopt a receipts method as previously discussed, the sourcing rules for financial institutions in K.S.A. 79-1130 were not amended by the law. Thus, financial institutions generally will source receipts from services using the costs of performance method; however, under K.S.A. 79-1130(n) "other receipts" of a financial institution, which references K.S.A. 79-3287, adopt the new market-based sourcing rules for corporations.

Under the new corporation income tax sourcing rules, the taxpayer's market for sales is in Kansas as follows:

  • Services: to the extent the service is delivered to a Kansas location
  • Intangible property that is rented, leased or licensed: to the extent the property is used in Kansas
  • Intangible property used in marketing a good or service to a consumer: if the good or service is purchased by an in-state consumer
  • Intangible property that is sold: to the extent it is used in the state, with specific provisions for certain transactions
  • Interest from a loan: to the extent the real property securing the loan is located in Kansas or, if not secured by real property, to the extent the borrower is located in Kansas
  • Dividends: to the extent the payor's commercial domicile is located in Kansas

Communications services providers may assign sales of non-tangible property to Kansas using the costs of performance method.

Corporate income tax rate

The law allows for future corporate rate reductions in the event that revenue thresholds are met. The first rate reduction could take effect for tax years beginning after December 31, 2028. The Secretary of Revenue will compute the corporate income tax rate reduction using the certified amount of actual corporate income tax receipts revenues exceeding the prior year's receipts. The new rate, if applicable, would be published by October 1, 2028, and it would remain in effect until changed by law.

Other

The law specifically excludes from the sales factor of electric and natural gas public utilities sales made to affiliated utility members in a unitary business group.

Implications

For financial statement purposes, the effects of HB 2231 should be accounted for in a company's interim period, which includes April 24, 2025, the date it was signed into law.

Kansas joins over 35 other states in adopting market-based sourcing and single sales factor apportionment. Taxpayers with sales into Kansas should review these changes and consider modeling the impact they may have on their Kansas tax obligations. In addition, publicly traded companies should evaluate whether they are eligible for the new deferred tax impact deduction on their relevant Kansas tax return. The Secretary of Revenue, who is tasked with prescribing the form, may specify the information it must contain or the calculation.

* * * * * * * * * *
Endnotes

1 K.S.A. 79-1129(f) and K.S.A. 79-3279(e).

2 Publicly traded companies include affiliated corporations that are part of the publicly traded company's financial statements prepared in accordance with generally accepted accounting principles (GAAP), as of July 1, 2025.

3 K.S.A. 79-1129 for financial institutions and K.S.A. 79-3279 for corporations.

4 The law defines net deferred tax liability as "deferred tax liabilities that exceed the deferred tax assets of the taxpayer, as computed in accordance with [GAAP]."

5 The law defines net deferred tax asset as "deferred tax assets exceed the deferred tax liabilities of the taxpayer, as computed in accordance with [GAAP]."

* * * * * * * * * *
Contact Information

For additional information concerning this Alert, please contact:

For Kansas income tax questions

For State tax policy:

Published by NTD’s Tax Technical Knowledge Services group; Jennifer Mannetta, legal editor

Document ID: 2025-0994

 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 1996 – 2025, Ernst & Young LLP

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

EY US Tax News Update Master Agreement | EY Privacy Statement