House Study Bill 233 - Introduced HOUSE FILE _____ BY (PROPOSED COMMITTEE ON WAYS AND MEANS BILL BY CHAIRPERSON SANDS) A BILL FOR An Act relating to the corporate income tax by creating an 1 alternative base income tax and an alternative unrelated 2 business income tax imposed at the election of the taxpayer 3 and including effective date and retroactive applicability 4 provisions. 5 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 6 TLSB 2489YC (2) 85 mm/sc

H.F. _____ Section 1. Section 422.21, subsection 1, Code 2013, is 1 amended to read as follows: 2 1. Returns shall be in the form the director prescribes, 3 and shall be filed with the department on or before the last 4 day of the fourth month after the expiration of the tax year. 5 However, cooperative associations as defined in section 6072(d) 6 of the Internal Revenue Code shall file their returns on or 7 before the fifteenth day of the ninth month following the close 8 of the taxable year and nonprofit corporations subject to 9 the unrelated business income tax imposed by section 422.33, 10 subsection 1A , or section 422.33A, subsection 3A, shall file 11 their returns on or before the fifteenth day of the fifth 12 month following the close of the taxable year. If, under the 13 Internal Revenue Code, a corporation is required to file a 14 return covering a tax period of less than twelve months, the 15 state return shall be for the same period and is due forty-five 16 days after the due date of the federal tax return, excluding 17 any extension of time to file. In case of sickness, absence, 18 or other disability, or if good cause exists, the director may 19 allow further time for filing returns. The director shall 20 cause to be prepared blank forms for the returns and shall 21 cause them to be distributed throughout the state and to be 22 furnished upon application, but failure to receive or secure 23 the form does not relieve the taxpayer from the obligation of 24 making a return that is required. The department may as far as 25 consistent with the Code draft income tax forms to conform to 26 the income tax forms of the internal revenue department of the 27 United States government. Each return by a taxpayer upon whom 28 a tax is imposed by section 422.5 shall show the county of the 29 residence of the taxpayer. 30 Sec. 2. NEW SECTION . 422.33A Corporate tax imposed —— 31 alternative base income tax. 32 1. For purposes of this section: 33 a. “Base income” means the taxable income before the net 34 operating loss deduction, as properly computed for federal 35 -1- LSB 2489YC (2) 85 mm/sc 1/ 9

H.F. _____ income tax purposes under the Internal Revenue Code, less 1 interest and dividends from federal securities. 2 b. The word “manufacture” shall include the extraction and 3 recovery of natural resources and all processes of fabricating 4 and curing. 5 c. The word “sale” shall include exchange. 6 d. “Tangible personal property” means corporeal personal 7 property, such as machinery, tools, implements, goods, wares, 8 and merchandise. “Tangible personal property” does not mean 9 money deposits in banks, shares of stock, bonds, notes, 10 credits, or evidence of an interest in property and evidences 11 of debt. 12 2. Notwithstanding any other provision of law, a 13 corporation may, in lieu of the taxes imposed under section 14 422.33, elect to be subject to state income tax as imposed and 15 computed pursuant to subsections 3 and 4. Such election must 16 be made not later than the due date for filing the return for 17 a taxable year, including extensions thereof, and under rules 18 to be prescribed by the director. An election by a member of 19 an affiliated group filing a consolidated return pursuant to 20 section 422.37 shall not be effective unless such election is 21 made by all members of the affiliated group. 22 3. A tax is imposed annually upon each corporation doing 23 business in this state, or deriving income from sources within 24 this state, and making an election under subsection 2, which 25 tax shall be levied, collected, and paid annually in an amount 26 equal to the base income of the corporation times six percent. 27 4. There is imposed upon each corporation exempt from 28 the general business tax on corporations by section 422.34, 29 subsection 2, and making an election under subsection 2 of this 30 section, a tax in an amount equal to the state’s apportioned 31 share computed in accordance with subsections 5 and 6 of the 32 unrelated business income computed in accordance with the 33 Internal Revenue Code, less interest and dividends from federal 34 securities, times six percent. 35 -2- LSB 2489YC (2) 85 mm/sc 2/ 9

H.F. _____ 5. If the trade or business of the corporation is carried 1 on entirely within the state, the tax shall be imposed on the 2 entire base income, but if the trade or business is carried 3 on partly within and partly without the state or if income 4 is derived from sources partly within and partly without the 5 state, or if income is derived from trade or business and 6 sources, all of which are not entirely in the state, the 7 tax shall be imposed only on the portion of the base income 8 reasonably attributable to the trade or business or sources 9 within the state, with the base income attributable to the 10 state to be determined as follows: 11 a. Nonbusiness interest, dividends, rents and royalties, 12 less related expenses, shall be allocated within and without 13 the state in the following manner: 14 (1) Nonbusiness interest, dividends, and royalties from 15 patents and copyrights shall be allocable to this state if the 16 taxpayer’s commercial domicile is in this state. 17 (2) Nonbusiness rents and royalties received from real 18 property located in this state are allocable to this state. 19 (3) Nonbusiness rents and royalties received from tangible 20 personal property are allocable to this state to the extent 21 that the property is utilized in this state; or in their 22 entirety if the taxpayer’s commercial domicile is in this state 23 and the taxpayer is not taxable in the state in which the 24 property is utilized. The extent of utilization of tangible 25 personal property in a state is determined by multiplying the 26 rents and royalties by a fraction, the numerator of which is 27 the number of days of physical location of the property in the 28 state during the rental or royalty period in the taxable year 29 and the denominator of which is the number of days of physical 30 location of the property everywhere during all rental or 31 royalty periods in the taxable year. If the physical location 32 of the property during the rental or royalty period is unknown 33 or unascertainable by the taxpayer, tangible personal property 34 is utilized in the state in which the property was located at 35 -3- LSB 2489YC (2) 85 mm/sc 3/ 9

H.F. _____ the time the rental or royalty payor obtained possession. 1 (4) Nonbusiness capital gains and losses from the sale or 2 other disposition of assets shall be allocated as follows: 3 (a) Gains and losses from the sale or other disposition 4 of real property located in this state are allocable to this 5 state. 6 (b) Gains and losses from the sale or other disposition of 7 tangible personal property are allocable to this state if the 8 property had a situs in this state at the time of the sale or 9 disposition or if the taxpayer’s commercial domicile is in this 10 state and the taxpayer is not taxable in the state in which the 11 property had a situs. 12 (c) Gains and losses from the sale or disposition of 13 intangible personal property are allocable to this state if the 14 taxpayer’s commercial domicile is in this state. 15 b. Base nonbusiness income of the above class having 16 been separately allocated and deducted as above provided, 17 the remaining base business income of the taxpayer shall be 18 allocated and apportioned as follows: 19 (1) Business interest, dividends, rents, and royalties 20 shall be reasonably apportioned within and without the state 21 under rules adopted by the director. 22 (2) Capital gains and losses from the sale or other 23 disposition of assets shall be apportioned to the state based 24 upon the business activity ratio applicable to the year the 25 gain or loss is determined if the corporation determines Iowa 26 taxable income by a sales, gross receipts, or other business 27 activity ratio. If the corporation has only allocable income, 28 capital gains and losses from the sale or other disposition of 29 assets shall be allocated in accordance with paragraph “a” , 30 subparagraph (4). 31 (3) Where income is derived from business other than the 32 manufacture or sale of tangible personal property, the income 33 shall be specifically allocated or equitably apportioned within 34 and without the state under rules of the director. 35 -4- LSB 2489YC (2) 85 mm/sc 4/ 9

H.F. _____ (4) Where income is derived from the manufacture or sale of 1 tangible personal property, the part attributable to business 2 within the state shall be in that proportion which the gross 3 sales made within the state bear to the total gross sales. 4 (5) Where income consists of more than one class of income 5 as provided in subparagraphs (1) to (4) of this paragraph, it 6 shall be reasonably apportioned by the business activity ratio 7 provided in rules adopted by the director. 8 (6) The gross sales of the corporation within the state 9 shall be taken to be the gross sales from goods delivered 10 or shipped to a purchaser within the state regardless of 11 the F.O.B. point or other conditions of the sale, excluding 12 deliveries for transportation out of the state. 13 6. If any taxpayer believes that the method of allocation 14 and apportionment hereinbefore prescribed, as administered 15 by the director and applied to the taxpayer’s business, has 16 operated or will so operate as to subject the taxpayer to 17 taxation on a greater portion of the taxpayer’s base income 18 than is reasonably attributable to business or sources within 19 the state, the taxpayer shall be entitled to file with the 20 director a statement of the taxpayer’s objections and of such 21 alternative method of allocation and apportionment as the 22 taxpayer believes to be proper under the circumstances with 23 such detail and proof and within such time as the director 24 may reasonably prescribe; and if the director shall conclude 25 that the method of allocation and apportionment theretofore 26 employed is in fact inapplicable and inequitable, the director 27 shall redetermine the taxable income by such other method of 28 allocation and apportionment as seems best calculated to assign 29 to the state for taxation the portion of the income reasonably 30 attributable to business and sources within the state, not 31 exceeding, however, the amount which would be arrived at by 32 application of the statutory rules for apportionment. 33 7. Notwithstanding any other provision of law, a 34 corporation making an election under subsection 2 shall not 35 -5- LSB 2489YC (2) 85 mm/sc 5/ 9

H.F. _____ be allowed any nonrefundable or refundable credit otherwise 1 allowable under this division for the tax year for which the 2 election is made, except for the credit for estimated tax paid 3 under section 422.91. 4 Sec. 3. Section 422.34A, subsection 8, Code 2013, is amended 5 to read as follows: 6 8. Utilizing a distribution facility within this state, 7 owning or leasing property at a distribution facility within 8 this state that is used at or distributed from the distribution 9 facility, or selling property shipped or distributed from 10 a distribution facility. For purposes of this subsection , 11 “distribution facility” means an establishment where shipments 12 of tangible personal property are processed for delivery 13 to customers. “Distribution facility” does not include an 14 establishment where retail sales of tangible personal property 15 or returns of such property are undertaken with respect to 16 retail customers on more than twelve days a year except for a 17 distribution facility which processes customer sales orders 18 by mail, telephone, or electronic means, if the distribution 19 facility also processes shipments of tangible personal property 20 to customers provided that not more than ten percent of the 21 dollar amount of goods are delivered and shipped so as to be 22 included in the gross sales of the corporation within this 23 state as provided in section 422.33, subsection 2 , paragraph 24 “b” , subparagraph (6) , or section 422.33A, subsection 5, 25 paragraph “b” , subparagraph (6), if applicable . 26 Sec. 4. Section 422.36, subsection 6, Code 2013, is amended 27 to read as follows: 28 6. A foreign corporation is not required to file a return 29 if its only activities in Iowa are the storage of goods for a 30 period of sixty consecutive days or less in a warehouse for 31 hire located in this state whereby the foreign corporation 32 transports or causes a carrier to transport such goods to that 33 warehouse and provided that none of the goods are delivered 34 or shipped so as to be included in the gross sales of the 35 -6- LSB 2489YC (2) 85 mm/sc 6/ 9

H.F. _____ corporation within this state as provided in section 422.33, 1 subsection 2 , paragraph “b” , subparagraph (6) , or section 2 422.33A, subsection 5, paragraph “b” , subparagraph (6), if 3 applicable . 4 Sec. 5. Section 422.37, subsection 2, Code 2013, is amended 5 to read as follows: 6 2. All members of the affiliated group shall join in the 7 filing of an Iowa consolidated return to the extent they are 8 subject to the tax imposed by section 422.33 or 422.33A . 9 Sec. 6. Section 422.85, Code 2013, is amended to read as 10 follows: 11 422.85 Imposition of estimated tax. 12 A taxpayer subject to the tax imposed by sections 422.33 , 13 422.33A, and 422.60 shall make payments of estimated tax for 14 the taxable year if the amount of tax payable, less credits, 15 can reasonably be expected to be more than one thousand dollars 16 for the taxable year. For purposes of this division , “estimated 17 tax” means the amount which the taxpayer estimates to be the tax 18 due and payable under division III or V of this chapter for the 19 taxable year. 20 Sec. 7. Section 441.21, subsection 11, Code 2013, is amended 21 to read as follows: 22 11. Beginning with valuations established on or after 23 January 1, 1995, as used in this section , “residential 24 property” includes all land and buildings of multiple housing 25 cooperatives organized under chapter 499A and includes land 26 and buildings used primarily for human habitation which land 27 and buildings are owned and operated by organizations that 28 have received tax-exempt status under section 501(c)(3) of the 29 Internal Revenue Code and rental income from the property is 30 not taxed as unrelated business income under section 422.33, 31 subsection 1A , or section 422.33A, subsection 4 . 32 Sec. 8. EFFECTIVE UPON ENACTMENT. This Act, being deemed of 33 immediate importance, takes effect upon enactment. 34 Sec. 9. RETROACTIVE APPLICABILITY. This Act applies 35 -7- LSB 2489YC (2) 85 mm/sc 7/ 9

H.F. _____ retroactively to January 1, 2013, for tax years beginning on 1 or after that date. 2 EXPLANATION 3 This bill relates to the corporate income tax by creating 4 an alternative base income tax and an alternative unrelated 5 business income tax imposed at the election of the taxpayer. 6 In lieu of the regular corporate income tax and unrelated 7 business income tax computed and imposed under Code section 8 422.33, a corporation may elect to be subject to an alternative 9 base income tax and an alternative unrelated business income 10 tax as provided in the bill. An election must be made not 11 later than the due date for filing the return for a taxable 12 year, including extensions, and under rules prescribed by the 13 director. If the corporation is a member of an affiliated 14 group filing a consolidated return, the election must be 15 made by every member of the affiliated group in order to be 16 effective. 17 The base income tax of a corporation making an election 18 shall be an amount of tax equal to the corporation’s base 19 income times six percent. “Base income” is defined as the 20 corporation’s taxable income before the net operating loss 21 deduction as properly computed for federal income tax purposes, 22 less interest and dividends from federal securities. 23 The unrelated business income tax of an exempt corporation 24 subject to the tax on unrelated business income and making 25 an election shall be an amount equal to the corporation’s 26 unrelated business income computed in accordance with the 27 Internal Revenue Code, less interest and dividends from federal 28 securities, times six percent. 29 Under the bill, both base income and unrelated business 30 income are allocated and apportioned to Iowa in the same manner 31 as net income and unrelated business income under the regular 32 corporate income tax in Code section 422.33. 33 A corporation making an election is not allowed any 34 nonrefundable or refundable tax credit for the tax year for 35 -8- LSB 2489YC (2) 85 mm/sc 8/ 9

H.F. _____ which the election is made, except the credit for estimated tax 1 paid under Code section 422.91. 2 The bill makes conforming amendments to include references 3 to new Code section 422.33A in those Code sections that 4 reference the tax imposed under Code section 422.33. 5 The bill takes effect upon enactment and applies 6 retroactively to January 1, 2013, for tax years beginning on 7 or after that date. 8 -9- LSB 2489YC (2) 85 mm/sc 9/ 9