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Maine tax bill would update the state's income tax and service provider tax laws

 

Maine tax bill would update the state's income tax and service provider tax laws

Feb 18, 2020

On January 14, 2020, Maine Rep. Ryan Tipping (D. Orono, House chair of the Joint Standing Comittee on Taxation) introduced LD 2011 (H.P. 1432). This tax bill would:

  • Expand Maine’s service provider tax to include consumer purchases of digital media;
  • Establish a factor presence nexus standard and corresponding safe harbor under Maine’s corporate income tax; and
  • Conform the state’s corporate and individual income tax net operating loss (NOL) provisions to the Internal Revenue Code (Code).

Expansion of service provider tax to include digital media

Maine’s sales and use taxes, currently imposed at a 5.5% rate, do not generally apply to the sale of services. However, specified services have historically been subject to a separate Maine tax called the service provider tax, currently imposed at a 6% rate. Unlike most states’ sales taxes, which are imposed on the consumer, Maine’s service provider tax is imposed on the seller, though it may be passed through to the consumer if separately identified as “service provider tax.” 

LD 2011 would expand the scope of services subject to the service provider tax to include “digital audio-visual and digital audio services,” defined as the electronic transfer of “digital audio-visual works” and “digital audio works” such as ringtones.[1] The bill’s summary indicates that the purpose of this change is to equalize the tax treatment of consumer purchases of digital media between the sales/use tax and the service provider tax.

The bill would establish the following sourcing regime to these services, based upon the first use of the service by the purchaser:[2]

  1. First use by purchaser at business location of the seller: sourced to that business location.
  2. First use by purchaser at location other than business location of seller: sourced to where the service is used by the purchaser, including the location indicated by delivery instructions.
  3. Sourced to address of purchaser in seller’s business records: used when options #1 and #2 do not apply.
  4. Sourced to address of purchaser not in seller’s business records, using address obtained during the consummation of the sale, including the address of the purchaser’s payment instrument: used when options #1-#3 do not apply.
  5. Sourced to address from which service provided: used when options #1-4 do not apply or when insufficient information exists to apply them.

These changes would first apply to purchases occurring on or after October 1, 2020.

Corporate income tax factor presence nexus standard and safe harbor

Historically, Maine’s corporate income tax has applied to any corporation that, during any taxable year, has “realized Maine net income,” a standard that the bill’s summary describes as “the current general ‘economic nexus’ standard.” Under LD 2011, Maine would replace this standard with a “factor presence” nexus standard that would subject corporations to the state’s corporate income tax only if they exceeded any of the following thresholds:

  • $250,000 of Maine property;
  • $250,000 of Maine payroll;
  • $500,000 of Maine sales; or
  • 25% of the corporation’s Maine property, payroll or sales.[3]

Note that the proposed $250,000 property and payroll thresholds are much higher than the $50,000 thresholds used by most states under the Multistate Tax Commission’s (MTC) model factor presence nexus rule

According to the bill’s summary, the above thresholds would also create a “safe harbor” for those corporations whose in-state physical presence is greater than de minimis, but falls below the proposed property or payroll thresholds. 

To support this outcome, sales sourced to Maine under the state’s throwback rule for sales of tangible personal property to the federal government would not be counted towards the $500,000 Maine sales threshold.[4]

Under this bill, a corporate partner would be subject to Maine’s corporate income tax if if was a direct or indirect owner of a partnership that exceeeds any of the above thresholds at the partnership level.

This approach could create practical difficulties for corporate partners to know whether or not they have nexus in Maine, particularly for indirect partners, because most states’ K-1s do not indicate the property, payroll or sales factor numerators of the source partnership.

These changes would first apply to tax years beginning on or after January 1, 2021. 

Federal conformity for NOLs for corporate and individual income tax purposes

For Maine corporate income tax purposes, NOLs have historically been calculated and utilized on a pre-apportionment basis, with only a partial modification of the NOL deduction claimed on federal Form 1120, line 29a. 

For Maine individual income tax purposes, Maine has also historically conformed to the federal NOL deduction with certain modifications

Effective for taxable years beginning on or after January 1, 2018, the federal Tax Cuts and Jobs Act (TCJA) modified the federal corporate and individual income tax NOL rules by eliminating carrybacks, changing from a 20-year to an indefinite carryforward period, and limiting regular NOL carryforward deductions to 80% of current-year regular taxable income.  

Maine’s 2018 tax bill (LD 1655) decoupled from those federal changes, and permitted a subtraction modification under both the corporate and individual income taxes to reverse the TCJA’s 80% NOL limitation. However, under LD 2011, Maine would conform its corporate and individual income tax NOL provisions with those under the TCJA.[5]

These changes would retroactively apply for tax years beginning on or after January 1, 2018.


[1] H.P. 1432, Sec. A-2 to A-7.

[2] H.P. 1432, Sec. A-8.

[3] H.P. 1432, Sec. B-2.

[4] H.P. 1432, Sec. B-2, enacting new M.R.S. § 5200-B.2 (its’ cross-reference to M.R.S. § 5211(14)(B) is presumably intended to refer to M.R.S. § 5211(15)(B)).

[5] H.P. 1432, Sec. D-1 to D-5.

Author(s)

Michael Santo
Michael J. Santo, CPA
Senior Tax Manager
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