Multistate Tax Alert: Nebraska Adds New Defined Corporate Income Tax Terms
And adopts market sourcing for sales other than sales of tangible personal property
Nebraska Governor Heineman recently signed into law Legislative Bill 872 (“LB 872”)1, a revenue committee bill that contains various modifications to Nebraska’s corporate income tax. In the attached Tax Alert we summarize LB 872, which adds new defined terms to the Nebraska corporate income tax and adopts market-based apportionment sourcing for sales other than sales of tangible personal property. These law changes are effective for all tax years beginning on or after January 1, 2014.
Legislative Bill 872
Neb. Rev. Stat. § 77-2734.04 (corporate income tax defined terms)
Under current law, Nebraska defines few terms relating to the corporate income tax.2 LB 872 significantly expands the defined terms and clarifies existing defined terms in Neb. Rev. Stat. § 77-2724.04. The amendments focus mainly on terms relating to service industries, such as financial services, loan servicing, telecommunications, and other communications companies. The new and expanded defined terms aid in the determination of the sales factor apportionment as amended under LB 872 (discussed below). The new and expanded defined terms also include definitions for< the following: annual average amortized loan balance, application service, billing address, borrower located in the state, buyer, commercial domicile, communications company, telecommunications, internet related communication companies, broadcast companies, owners/operators of communications equipment, credit card, intangible property, loan, loan secured by real property, loan secured by tangible personal property, loan servicing fee, participation, treasury function, and sales. Note that excluded from the revised definition of the term “sales” are discharge of indebtedness, amounts from the hedging of intangible assets, and net gains from marketable securities.
Neb. Rev. Stat. § and 77-2734.14(3) (sales factor determination)
LB 872 amends the current statute by significantly developing and expanding the sourcing guidance related to sales other than sales of tangible personal property. Additionally, the new law amends the current sourcing of these sales from an income-producing activity method to a market-based method. Under current law, a sale is in Nebraska if “the income-producing activity is performed in this state; or the income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of
LB 872 amends the method for determining when a sale of a service is in Nebraska, stating that such sales are in this state if they are derived from a buyer within this state. Sales of a service are derived from a buyer within this state if: (1) the service relates to real or tangible personal property located in Nebraska; (2) the service is provided to an individual physically present in Nebraska when the service is received; or (3) if the service, when rendered, is provided to a buyer engaged in a trade or business in Nebraska and relates to that part of the trade or business then operated in Nebraska. Furthermore, LB 872 provides that if a buyer uses the service within and without Nebraska, the sales are apportioned between the use in Nebraska in proportion to the use of the service in Nebraska and the use within the other
With respect to intangible property, the new law provides that a sale is in Nebraska if the buyer uses the intangible at a location in this state. If the buyer uses the intangible property within and without Nebraska, the sale is apportioned between this state in proportion to the use of the property in this state and the use in the other state(s). If the location of an intangibles sale cannot be determined, the sale is in Nebraska if the buyer’s billing address is in this state.
In addition, LB 872 employs a catch-all provision that states that sales other than sales of tangible personal property not specifically addressed elsewhere in the law are sourced so as to fairly represent the taxpayer’s business activity in Nebraska. Applying this provision, if the buyer is an individual, a sale is deemed to occur at the buyer’s billing address. Also, the new law provides, “if the buyer is not an individual and the sale is from an order placed in the regular course of the customer’s business, the sale is deemed to have occurred in the state from which the order was placed and, if that place cannot be readily determined, the sale is deem to have occurred at the customer’s billing address.”
Finally, LB 872 specifies a departure from the new market-based sourcing rules for sales other than sales of tangible personal property by communications companies as defined under LB 872. These companies will have sales in Nebraska if the income producing activity is performed in Nebraska or the income producing activity is performed both in and outside Nebraska and a greater proportion of the income producing activity is performed in Nebraska than in any other state, based on costs of performance.
1 LB 872 (adopted Apr. 10, 2012).
2 Neb. Rev. Stat. § 77-2734.04.
3 Neb. Rev. Stat. § 77-2734.14(3)(a)-(b).
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