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Vermont enacts significant corporate income tax changes
June 2022
In brief
Signed on May 31, S,B. 53 makes several changes to Vermont’s corporate income tax applicable to tax years beginning on or after January 1, 2023. These include (1) the repeal of an overseas business organization exclusion and its replacement with a foreign corporation exclusion, (2) a minimum tax increase, (3) use of a single sales factor apportionment formula and throwback repeal, (4) requiring informational reporting of payroll and property factors, (5) migrating from Joyce to Finnigan treatment, and (6) application of federal consolidated return rules.
The takeaway: Vermont taxpayers should consider implications to their 2023 tax year due to the changes implemented by S.B. 53. A close focus should be on the composition of a Vermont combined group, which would no longer exclude 80/20 companies but would exclude foreign corporations, in addition to the application of the federal consolidated return rules. The single sales factor and repeal of the throwback rule may also have a significant impact on a taxpayer’s Vermont tax liability.
In detail
Repeal of overseas business organization exclusion; replaced with foreign corporation exclusion for 2023 tax year
S.B. 53 replaces Vermont’s overseas business organization exclusion with a foreign corporation exclusion beginning in 2023.
Current law - overseas business organization exclusion
For tax years beginning before January 1, 2023, members of a Vermont affiliated group must file a group return. There is no domestic/foreign organized requirement for this purpose. Accordingly, all foreign and domestic entities that satisfy the affiliated requirement are included in a group return, unless exempt.
One such exemption regarded “overseas business organizations,” defined as "a business organization that ordinarily has 80 percent or more of its payroll and property outside the 50 states and the District of Columbia." The test generally must be satisfied in two out of the last three most recent tax years.
In other words, a domestic or foreign entity with 80% or more of its payroll or property sourced outside of the United States was excluded from a Vermont affiliated group.
Starting in 2023 - foreign corporation exclusion
Applicable to tax years beginning on or after January 1, 2023, Vermont removes the “overseas business organization” exclusion from the definition of a Vermont affiliated group. Instead, excluded from the definition of a Vermont affiliated group are “foreign corporations.”
Accordingly, starting in 2023, a foreign corporation is excluded from a Vermont affiliated group regardless of its US activity. However, the “80/20” exclusion previously applicable to domestic corporations no longer will apply.
Minimum tax increase
Prior to S.B. 53, Vermont imposed a tiered minimum tax measured by Vermont gross receipts. The maximum “minimum tax” was $750 for corporations with Vermont gross receipts over $5 million.
Applicable to tax years beginning on or after January 1, 2023, the tiers are revised as noted below:
- $100 tax for Vermont gross receipts from $0 to $500,000
- $500 tax for Vermont gross receipts from $500,001 to $1 million
- $2,000 tax for Vermont gross receipts from $1,000,001 to $5 million
- $6,000 tax for Vermont gross receipts from $5,000,001 to $300 million
- $100,000 tax for Vermont gross receipts greater than $300 million.
Single sales factor starting in 2023, throwback repeal
Single sales factor
Prior to S.B. 53, Vermont imposed a three-factor, double-weighted sales factor apportionment formula.
Applicable to tax years beginning on or after January 1, 2023, Vermont imposes a single-sales factor apportionment formula.
Throwback repeal
Applicable to tax years beginning on or after January 1, 2023, Vermont no longer requires the inclusion of sales in the sales factor numerator relating to property shipped from a place in Vermont to a state where the taxpayer is not taxable.
Property and payroll reporting
Applicable to tax years beginning on or after January 1, 2023, taxpayers subject to apportionment must report their Vermont property and payroll factors as so defined in S.B. 53.
Transition from Joyce to Finnigan apportionment method
For tax years beginning on and after January 1, 2023, for purposes of determining whether sales are in Vermont and are included in the numerator of the sales apportionment factor, if the activities of any member of a unitary group create nexus with this State, then sales of tangible personal property into Vermont from outside the State by all members of the unitary group shall be included in the Vermont sales factor numerator.
Affiliated group reporting as a “single taxpayer”
Applicable for tax years beginning on or after January 1, 2023, an affiliated group engaged in a unitary business “shall be treated as a single taxpayer.” Additionally:
“A unitary combined return shall include the income and apportionment factors of any taxable corporation incorporated in the United States or formed under the laws of any state, the District of Columbia, or any territory or possession of the United States and in a unitary relationship with the taxpayer. The income, gain, or losses from members of a combined group shall be combined to the extent allowed under the Internal Revenue Code for consolidated filing as if the combined group was a consolidated filing group, provided that a state tax credit shall not be combined and shall be limited to the member to which the credit is attributed.”
IRC conformity
Applicable to tax years beginning on and after January 1, 2021, references to the Internal Revenue Code are updated to the Code as amended through December 31, 2021.
Prior conformity was to the Code as amended through December 31, 2020.
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