Arizona—New guidance on composite filing requirements

The Arizona Department of Revenue issued a 2013 informational release reiterating that if certain conditions are met it will accept a composite return of the qualifying nonresident individual owners in a PTE in lieu of each owner filing a separate Arizona individual income tax return. The new ruling sets forth in detail limitations and conditions that will apply to the owners included in the composite return; describes what the filing of the composite return will comprise; explains how to compute each member’s deductions, exemptions, and liability; and covers certain other matters relating to composite returns. Arizona Individual Income Tax Ruling No. 13-2 (May 6, 2013); superseding Arizona Individual Income Tax Ruling No. 97-1 (July 22, 1997).

Illinois—Changes to alternative apportionment, composite return, and nonresident withholding

An income tax bill approved by the Illinois General Assembly would eliminate composite income and replacement tax returns for members of PTEs classified as partnerships for federal tax purposes and shareholders of S corporations. In addition, the bill clarifies the availability of alternative apportionment methods for tax years after 2008 if the rules under the state’s single sales factor do not fairly represent the taxpayer’s market for goods, services, or other sources of business income attributable to Illinois. PTEs computing the amount of income tax to withhold on behalf of nonresident owners would be required to include nonbusiness income and distributable credits in that calculation, effective for tax years beginning after 2013. H.B. 3157, as passed by the Senate on May 23, 2013, and concurred by the House of Representatives on May 28, 2013.

Montana—Changes to composite filing rules

Effective March 28, 2013, Admin. R. Mont. § 42.9.101 was amended to permit nonresident trusts and estates, whose only Montana-source income for the tax year is from a PTE, to be included in a composite tax return. Additionally, Admin. R. Mont. § 42.9.201 was amended to provide that the Department will not accept an income or corporate tax return from eligible participants in a composite tax return.

Oklahoma—Expansion in types of owners that may be included in composite filing

The Oklahoma Tax Commission amended a regulation, Okla. Admin. Code § 710:50-19-1, to allow partnerships with two or more partners to file composite returns for nonresident partners that are C corporations, S corporations, or partnerships. Previously, only individuals and trusts were generally allowed to be included in composite returns.

Observation: These updates reflect a continuing state trend of loosening limitations on the types of owners permitted to be included in a composite filing. At one end of the spectrum are states that only permit nonresident individuals to be included in a composite filing; at the other, states that allow any type of owner to be included, even if the owner is itself a PTE. Even if the state’s rules do not allow for all types of owners to be included, some may grant permission to do so, though others will not.

Co-author - Patrick Smith, Director Baker Tilly Virchow Krause, LLP

Mr. Ely is a partner and Messrs. Thistle and Rhyne are associates with the multistate law firm of Bradley Arant Boult Cummings LLP in its Birmingham, Alabama office. Mr. Ely is Chair of the firm’s State & Local Tax Practice Group. Messrs. Ely, Thistle, and Rhyne co-author a chapter on the state taxation of PTEs in the treatise “Keatinge, Conaway and Ely on Choice of Business Entity” (West). Mr. Smith is the Tax Director at Baker Tilly Virchow Krause, LLP and is head of State & Local Tax Services for the firm’s Chicago office. Mr. Smith is a co-author of “State Taxation of Pass-Through Entities and Their Owners,” a treatise published by Warren Gorham and Lamont/West since 2005. Messrs. Ely and Smith have co-presented on this topic at NYU’s Institute on Federal Taxation, as have Messrs. Thistle and Smith for a webinar hosted by Strafford Publications in early June.