LR 8234
S Corporation Resident Credit
March 30, 2023
Dear Applicants:
This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your request dated January 8, 2023.
The facts as presented in your letter ruling request and in response to follow-up questions are summarized as follows:
Tax Entity is a Missouri S corporation and retailer. Tax Entity's base of operations is in Missouri, it is solely organized in Missouri, and it has no physical presence elsewhere.
The letter ruling request asserts that Tax Entity and its shareholders are sheltered from other states' and political subdivisions' income taxes under Federal Public Law 86-272 ("PL 86-272"), but pay other taxes to a few of those states. The Texas franchise tax is among the taxes paid. Additionally, Tax Entity derives income from states that do not impose an income tax. Tax Entity is treated as an S corporation in all states where it derives income. Additionally, Tax Entity does not pay state corporate income tax as a C corporation in any state.
Applicants ("the Taxpayers") are Missouri residents and shareholders of Tax Entity. They have previously taken credits against Missouri's income tax for amounts paid towards Texas' franchise tax and no other credits have been taken for income originating in other states. The Taxpayers have submitted a letter ruling request asking for a determination of their eligibility to receive the Section 143.081.3(2), RSMo, tax credit ("143.081.3(2) credit" or "the credit").
ISSUE 1:
Are the Taxpayers eligible to claim a 143.081.3(2) credit when Tax Entity ships products to another state that does not have an income tax?
RESPONSE 1:
Yes, the Taxpayers would be eligible for the credit for their shares of Missouri income tax imposed on Tax Entity's income originating in other states without an income tax. However, the Texas Franchise Tax ("TFT") is considered an income tax for purposes of Section 143.081.3(2), RSMo, so a 143.081.3(2) credit is not allowed based on income derived from Texas. Section 143.081.3(2), RSMo, states that:
A resident S shareholder shall be eligible for a credit issued pursuant to this section in an amount equal to the shareholder's pro rata share of any income tax imposed pursuant to this chapter on income derived from sources in another state of the United States, or a political subdivision thereof, or the District of Columbia, and which is subject to tax pursuant to this chapter but is not subject to tax in such other jurisdiction.
Under Section 143.081.3(2), RSMo, a credit is permitted to a resident S corporation shareholder in the amount equal to the Missouri individual income tax imposed on the shareholder's pro rata share of the income from the S corporation, provided that the following items are satisfied:
(a) The S corporation originated the income from sources in another state, political subdivision, or D.C.;
(b) The income is subject to an income tax under Chapter 143, RSMo, either at the S corporation level or the individual shareholder level; and
(c) The income is not subject to tax in the other jurisdiction, either at the S corporation level or the individual shareholder level.
Because the other states in this scenario lack an income tax, Tax Entity would not be subject to an income tax in those jurisdictions for purposes of Section 143.081.3(2), RSMo, meeting the requirements of item (c) in the paragraph above. With items (a) and (b) also being met, the Taxpayers are eligible for the 143.081.3(2) credit in this situation. This analysis does not apply to the Missouri income tax imposed on the Taxpayers for Tax Entity's income derived from Texas.
The TFT is an income tax for purposes of Section 143.081.3(2). The Taxpayers state that the TFT meets the test requirements set under Herschend v. Dir. of Revenue, 896 S.W.2d 458 (Mo. banc 1995). Despite the TFT being deemed a franchise tax by Texas law, the tax is based on a taxable entity's margin with their federal total revenue amount as the base of the calculation. Cf. Tex. Tax Code § 171.101. The TFT is fundamentally an income tax, at least for purposes of Section 143.081.3(2). The current TFT is significantly different from the Texas excise tax analyzed in Brennan v. Director of Revenue, 937 S.W.2d 210 (Mo. banc 1997), which at the time had both an income and a capital component. Because the TFT is an income tax, the Missouri income tax based on income derived by Tax Entity from Texas is not eligible for the credit.
ISSUE 2:
Are the Taxpayers eligible to claim a 143.081.3(2) credit when Tax Entity ships products to another state that does have an income tax, but the state does not tax Tax Entity's income due to PL 86-272 protections?
RESPONSE 2:
Yes, the Taxpayers are eligible for the credit under these circumstances. Based on the letter ruling request's assertion, the Tax Entity and the Taxpayers are protected under PL 86-272 from income taxes on Tax Entity's income in the other states referred to by this issue. PL 86-272's protections would apply to prohibit the imposition of an income tax on Tax Entity's income in the other states (or political subdivision), both at the S corporation level and after the income is passed through to the Taxpayers. This would satisfy item (c) that was mentioned earlier. Because items (a) and (b) mentioned above are also satisfied, the Taxpayers would be eligible for the 143.081.3(2) credit in this scenario as well.
This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.
Should additional information be needed, please contact Legal Counsel Vickie Adiele, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.
Sincerely,
Wayne Wallingford
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