SB0001CTS

SENATE CORPORATIONS AND TRANSPORTATION COMMITTEE SUBSTITUTE FOR

SENATE BILL 1

53rd legislature - STATE OF NEW MEXICO - first session, 2017

AN ACT

RELATING TO TAXATION; REQUIRING COMBINED REPORTING FOR A UNITARY GROUP; ALLOWING CORPORATIONS TO FILE A CONSOLIDATED RETURN; ADDING AND AMENDING DEFINITIONS IN THE CORPORATE INCOME AND FRANCHISE TAX ACT; REPEALING SECTION 7-2A-8.4 NMSA 1978 (BEING LAWS 1983, CHAPTER 213, SECTION 13, AS AMENDED).

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

SECTION 1. Section 7-2A-2 NMSA 1978 (being Laws 1986, Chapter 20, Section 33, as amended) is amended to read:

"7-2A-2. DEFINITIONS.--For the purpose of the Corporate Income and Franchise Tax Act and unless the context requires otherwise:

[A. "affiliated group" means that term as it is used in the Internal Revenue Code;

B.] A. "bank" means any national bank, national banking association, state bank or bank holding company;

[C.] B. "base income" means that part of the taxpayer's income defined as taxable income and upon which the federal income tax is calculated in the Internal Revenue Code for income tax purposes, including interest received on a state or local bond, plus [for taxable years beginning on or after January 1, 1991] the amount of the net operating loss deduction allowed by Section 172(a) of the Internal Revenue Code, as that section may be amended or renumbered, and claimed by the taxpayer for that year ["base income" also includes interest received on a state or local bond], subject to the following adjustments for a taxpayer that files a water's edge combined return, a worldwide combined return or a consolidated return:

(1) exclusion of one hundred percent of a dividend, net of direct expense, received or considered to be received from a subsidiary that is a member of a unitary group, if that subsidiary is organized or incorporated outside of the United States and is not included in a water's edge combined return or a consolidated return; provided that:

(a) the return factors include a portion of the foreign subsidiary's factors equal to the lesser of one hundred percent or a fraction that is the amount of dividend received or considered received divided by the current year earnings and profits of the foreign subsidiary, as determined under the Internal Revenue Code or Section 7-2A-6 NMSA 1978; and

(b) direct expense includes the portion of interest that is equal to the fraction of the total average investment in dividend-paying subsidiaries divided by the total investment in assets;

(2) for taxpayers not filing a worldwide combined return, exclusion of one hundred percent of the adjusted income of a foreign operating company, as determined under the Internal Revenue Code or Section 7-2A-6 NMSA 1978, after elimination of transactions with members of the unitary or consolidated group; provided that:

(a) the return factors include a portion of the foreign operating company's factors equal to a fraction that is the amount of income not excluded by this paragraph, divided by the company's adjusted income;

(b) income generated from intangible property or from a capital gain, dividend, interest, rent, royalty or other similar item that is generated from an asset held for investment and not from a regular business trading activity is not excluded; and

(c) any amount adjusted pursuant to Paragraph (1) of this subsection or this paragraph is not excluded from the income of a foreign operating company; and

(3) exclusion of any deduction, other than for premiums, for amounts paid directly or indirectly to a commonly controlled entity that is exempt from corporate income tax pursuant to Section 7-2A-4 NMSA 1978;

C. "captive real estate investment trust" means a corporation, trust or association taxed as a real estate investment trust pursuant to Section 857 of the Internal Revenue Code, the shares or beneficial interests of which are not regularly traded on an established securities market; provided that more than fifty percent of any class of beneficial interests or shares of the real estate investment trust are owned directly, indirectly or constructively by the taxpayer during all or a part of the taxpayer's taxable year;

D. "common ownership" means the direct or indirect control or ownership of more than fifty percent of the outstanding voting stock, ownership of which shall be determined pursuant to Section 1563 of the Internal Revenue Code, of:

(1) a parent-subsidiary controlled group as defined in Section 1563 of the Internal Revenue Code, except that fifty percent shall be substituted for eighty percent;

(2) a brother-sister controlled group as defined in Section 1563 of the Internal Revenue Code; or

(3) three or more corporations each of which is a member of a group of corporations described in Paragraph (1) or (2) of this subsection, and one of which is:

(a) a common parent corporation included in a group of corporations described in Paragraph (1) of this subsection; and

(b) included in a group of corporations described in Paragraph (2) of this subsection;

[D.] E. "corporation" means corporations, joint stock companies, real estate trusts organized and operated under the Real Estate Trust Act, financial corporations and banks, other business associations and, for corporate income tax purposes, partnerships and limited liability companies taxed as corporations under the Internal Revenue Code;

[E.] F. "department" means the taxation and revenue department, the secretary of taxation and revenue or any employee of the department exercising authority lawfully delegated to that employee by the secretary;

[F.] G. "fiscal year" means any accounting period of twelve months ending on the last day of any month other than December;

H. "foreign operating company" means a corporation if:

(1) the corporation is incorporated in the United States;

(2) the corporation is not a corporation that qualifies for the Puerto Rico and possession tax credit pursuant to Section 936 of the Internal Revenue Code; and

(3) the corporation has eighty percent or more of its property, payroll and sales sourced to locations outside the United States;

[G.] I. "Internal Revenue Code" means the United States Internal Revenue Code of 1986, as amended;

[H.] J. "net income" means base income adjusted to exclude:

(1) income from obligations of the

United States less expenses incurred to earn that income;

(2) other amounts that the state is prohibited from taxing because of the laws or constitution of this state or the United States;

(3) for taxable years that began prior to January 1, 1991, an amount equal to the sum of:

(a) net operating loss carryback deductions to that year from taxable years beginning prior to January 1, 1991 claimed and allowed, as provided by the Internal Revenue Code; and

(b) net operating loss carryover deductions to that year claimed and allowed;

(4) for taxable years beginning on or after January 1, 1991 and prior to January 1, 2013, an amount equal to the sum of any net operating loss carryover deductions to that year claimed and allowed; provided that the amount of any net operating loss carryover from a taxable year beginning on or after January 1, 1991 and prior to January 1, 2013 may be excluded only as follows:

(a) in the case of a timely filed return, in the taxable year immediately following the taxable year for which the return is filed; or

(b) in the case of amended returns or original returns not timely filed, in the first taxable year beginning after the date on which the return or amended return establishing the net operating loss is filed; and

(c) in either case, if the net operating loss carryover exceeds the amount of net income exclusive of the net operating loss carryover for the taxable year to which the exclusion first applies, in the next four succeeding taxable years in turn until the net operating loss carryover is exhausted for any net operating loss carryover from a taxable year prior to January 1, 2013; in no event may a net operating loss carryover from a taxable year beginning prior to January 1, 2013 be excluded in any taxable year after the fourth taxable year beginning after the taxable year to which the exclusion first applies; and

(5) for taxable years beginning on or after January 1, 2013, an amount equal to the sum of any net operating loss carryover deductions to that year claimed and allowed; provided that the amount of any net operating loss carryover may be excluded only as follows:

(a) in the case of a timely filed return, in the taxable year immediately following the taxable year for which the return is filed; or

(c) in either case, if the net operating loss carryover exceeds the amount of net income exclusive of the net operating loss carryover for the taxable year to which the exclusion first applies, in the next nineteen succeeding taxable years in turn until the net operating loss carryover is exhausted for any net operating loss carryover from a taxable year beginning on or after January 1, 2013; in no event shall a net operating loss carryover from a taxable year beginning: 1) prior to January 1, 2013 be excluded in any taxable year after the fourth taxable year beginning after the taxable year to which the exclusion first applies; and 2) on or after

January 1, 2013 be excluded in any taxable year after the nineteenth taxable year beginning after the taxable year to which the exclusion first applies;

[I.] K. "net operating loss" means any net operating loss, as defined by Section 172(c) of the Internal Revenue Code, as that section may be amended or renumbered, for a taxable year as further increased by the income, if any, from obligations of the United States for that year less related expenses;

[J.] L. "net operating loss carryover" means the amount, or any portion of the amount, of a net operating loss for any taxable year that, pursuant to Paragraph (3), (4) or (5) of Subsection [H] J of this section, may be excluded from base income;

[K.] M. "person" means any individual, estate, trust, receiver, cooperative association, club, corporation, company, firm, partnership, limited liability company, joint venture, syndicate or other association; "person" also means, to the extent permitted by law, any federal, state or other governmental unit or subdivision or agency, department or instrumentality thereof;

N. "real estate investment trust" has the meaning ascribed to the term in Section 856 of the Internal Revenue Code, as that section may be amended or renumbered;

O. "return" means any tax or information return, including a water's edge or worldwide combined return, a consolidated return, a declaration of estimated tax or a claim for refund, including any amendments or supplements to the return, required or permitted pursuant to a law subject to administration and enforcement pursuant to the Tax Administration Act and filed with the secretary or the secretary's delegate by or on behalf of any person;

[L.] P. "secretary" means the secretary of taxation and revenue or the secretary's delegate;

[M.] Q. "state" means any state of the United States, the District of Columbia, the commonwealth of Puerto Rico, any territory or possession of the United States or political subdivision thereof or any political subdivision of a foreign country;

[N.] R. "state or local bond" means a bond issued by a state other than New Mexico or by a local government other than one of New Mexico's political subdivisions, the interest from which is excluded from income for federal income tax purposes under Section 103 of the Internal Revenue Code, as that section may be amended or renumbered;

[O.] S. "taxable year" means the calendar year or fiscal year upon the basis of which the net income is computed under the Corporate Income and Franchise Tax Act and includes, in the case of the return made for a fractional part of a year under the provisions of that act, the period for which the return is made;

[P.] T. "taxpayer" means any corporation subject to the taxes imposed by the Corporate Income and Franchise Tax Act or a group of corporations filing a return pursuant to Section 7-2A-8.3 NMSA 1978; [and

Q.] U. "unitary [corporations] group" means [two or more integrated corporations, other than any foreign corporation incorporated in a foreign country and not engaged in trade or business in the United States during the taxable year, that are owned in the amount of more than fifty percent and controlled by the same person and for which at least one of the following conditions exists:

(1) there is a unity of operations evidenced by central purchasing, advertising, accounting or other centralized services;

(2) there is a centralized management or executive force and centralized system of operation; or

(3) the operations of the corporations are dependent upon or contribute property or services to one another individually or as] a group of corporations, including a captive real estate investment trust, but not including an S corporation, an insurance company subject to the provisions of the New Mexico Insurance Code, an insurance company that would be subject to the New Mexico Insurance Code if the insurance company engaged in business in this state or a real estate investment trust that is not a captive real estate investment trust, that:

(1) are related through common ownership; and

(2) by a preponderance of the evidence as determined by a court of competent jurisdiction or the department, are economically interdependent with one another as demonstrated by the following factors:

(a) centralized management;

(b) functional integration; and

V. "water's edge combined return" means a return combining the income and activities of all members of a unitary group, except members that are exempt from corporate income tax pursuant to Section 7-2A-4 NMSA 1978, that are:

(1) corporations organized or incorporated in the United States, including those corporations qualifying for the Puerto Rico and possession tax credit pursuant to Section 936 of the Internal Revenue Code; and

(2) corporations organized or incorporated outside of the United States if more than twenty percent of the corporations' property, payroll and sales are sourced to locations within the United States; and

W. "worldwide combined return" means a return combining the income and activities of all members of a unitary group, except members that are exempt from corporate income tax pursuant to Section 7-2A-4 NMSA 1978, irrespective of the country in which the corporations are incorporated or conduct business activity."

SECTION 2. Section 7-2A-8.3 NMSA 1978 (being Laws 1983, Chapter 213, Section 12, as amended) is amended to read:

"7-2A-8.3. COMBINED AND CONSOLIDATED RETURNS.--

A. A unitary [corporation] group that is subject to taxation under the Corporate Income and Franchise Tax Act [and that has not previously filed a combined return pursuant to this section or a consolidated return pursuant to Section 7-2A-8.4 NMSA 1978 may elect to file a combined return with other unitary corporations as though the entire combined net income were that of one corporation; provided, however, that for taxable years beginning on or after January 1, 2014, a unitary corporation that provides retail sales of goods in a facility of more than thirty thousand square feet under one roof in New Mexico shall file a combined return with other unitary corporations as though the entire combined net income were that of one corporation. The return filed under this method of reporting shall include the net income of all the unitary corporations. Transactions among the unitary corporations may be eliminated by applying the appropriate rules for reporting income for a consolidated federal income tax return. Any corporation that has filed an income tax return with New Mexico pursuant to Section 7-2A-8.4 NMSA 1978 shall not file pursuant to this section unless the secretary gives prior permission to file on a combined return basis.

B. Once corporations have reported net income through a combined return for any taxable year, they shall file combined returns for subsequent taxable years, so long as they remain unitary corporations, unless the corporations elect to file pursuant to Section 7-2A-8.4 NMSA 1978 or unless the secretary grants prior permission for one or more of the corporations to file individually.

C. For taxable years beginning on or after January 1, 1993, no unitary corporation once included in a combined return may elect, or be granted permission by the secretary, for any subsequent taxable year to separately account pursuant to Paragraph (4) of Subsection A of Section 7-2A-8 NMSA 1978.

D. Notwithstanding Subsection A of this section, a unitary corporation shall not be required to file a combined return pursuant to this section if that unitary corporation:

(1) has operations in New Mexico at facilities that do not provide retail sales of goods; and

(2) employs at least seven hundred fifty employees in New Mexico at such facilities] shall file a water's edge combined return, except if a unitary group elects to file a worldwide combined return.

B. If a unitary group files a worldwide combined return, each corporation in the unitary group shall not elect to file a return under any other method without prior permission of the secretary.

C. A corporation that is subject to taxation under the Corporate Income and Franchise Tax Act and that reports to the internal revenue service for federal income tax purposes its net income consolidated with the net income of one or more other corporations may elect to report to New Mexico on the same basis; provided that all other corporations that were included in the report to the internal revenue service on a consolidated basis consent to report to New Mexico on the same basis.

D. Once a corporation has been included in a consolidated return to New Mexico, the corporation shall not elect to file a New Mexico return under any other method without prior permission of the secretary, unless the change in reporting method is required or allowed under the Internal Revenue Code.

E. A group of corporations filing a water's edge or worldwide combined return or a consolidated return shall calculate the base income of the combined group by:

(1) computing base income on a separate return basis;

(2) combining income or loss of the members included in the return; and

(3) making appropriate eliminations and adjustments between members included in the return.

F. If an entity does not calculate federal taxable income, the base income shall be calculated based on the applicable federal tax laws or Section 7-2A-6 NMSA 1978.

G. For purposes of apportionment under the Uniform Division of Income for Tax Purposes Act:

(1) corporations filing a water's edge or worldwide combined return or a consolidated return shall not include intercompany sales or other intercompany transactions between the corporations included in the return in determining the sales factor;

(2) corporations filing a water's edge or worldwide combined return or a consolidated return shall not include intercompany rents or other intercompany transactions between the corporations included in the return in determining the property factor; and

(3) the amounts of the numerators in this state of the property, payroll and sales factors of an out-of-state business, as defined in Section 7-1-83 NMSA 1978, that are directly related to disaster- or emergency-related work during a disaster period shall not be included in the apportionment fraction of the group."

SECTION 3. REPEAL.--Section 7-2A-8.4 NMSA 1978 (being Laws 1983, Chapter 213, Section 13, as amended) is repealed.

SECTION 4. APPLICABILITY.--The provisions of this act

apply to taxable years beginning on or after January 1, 2018.

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