On January 27, 2016, Delaware Governor Jack Markell signed into law the Delaware Competes Act (House Bill 235) in an effort to make Delaware more competitive with neighboring states. Highlights of the act include: a phase-in of single-sales factor apportionment by 2020 (with exceptions), simplifications of Delaware business tax compliance for smaller businesses, and adjustments to property and payroll factors for non-U.S. corporations operating in Delaware.
Phase-in of Delaware Single-Sales Factor Apportionment
Single-sales factor apportionment will be implemented over a four-year period starting in 2017. A three-factor apportionment formula with a double-weighted sales factor will be used for tax years beginning after December 31, 2016, and prior to January 1, 2018. For tax years beginning after December 31, 2017 and prior to January 1, 2019, a three-factor apportionment formula with a triple-weighted sales factor will be used. A three-factor apportionment formula with a sextuple-weighted sales factor will be used for tax years beginning after December 31, 2018 and prior to January 1, 2020. For all tax years beginning after December 31, 2019, a single sales factor apportionment formula will be in place. A special exception is allowed for telecommunications corporations and certain corporations with their worldwide headquarters located in Delaware. These corporations may elect annually to apportion income under an equally weighted three-factor formula or the phased-in single sales factor formula.
Simplification of Delaware Business Tax Compliance for Smaller Businesses
For tax years beginning after December 31, 2016, the act would double (and index for future inflation) the threshold levels that require businesses to make monthly gross receipts tax and withholding filings. This would enable many Delaware businesses previously filing on a monthly basis to begin filing on a quarterly basis. Additionally, the act simplifies estimated tax payments for smaller businesses (businesses with receipts of less than $20 million). Currently, all corporations must pay their estimated tax liabilities as follows:
- First quarter – 50 percent,
- Second quarter – 20 percent,
- Third quarter – 20 percent, and
- Fourth quarter – 10 percent.
For tax years beginning after December 31, 2016, smaller businesses, as defined above, will be able to pay their estimated tax at a rate of 25 percent each quarter.
Special Apportionment Rules for Non-U.S. Corporations
Delaware law defines a non-U.S. corporation as a foreign corporation organized under the laws of a state other than the United States that is engaged in a trade or business in the United States. For tax years beginning after December 31, 2015, non-U.S. corporations may not dilute their property and payroll factors by including in the denominator of these fractions property and payroll that is located outside of the United States. Only property and payroll that are located in Delaware or another U.S. state are allowed in the denominator of the property or payroll factor.
For further information, or if you have any questions, please contact your local CBIZ MHM tax professional.
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