Insight The 2022 Idaho Legislature Has Enacted Major Income Tax Legislation
By Richard G. Smith,
The Idaho Legislature, together with Governor Little, passed some major legislation during the 2022 session ending in late March. The most visible and tangible legislation was the reduction of the income tax rate for all businesses and individuals from 6.5% to 6.0%. This is the third reduction in the rate in recent years, from the 7.4% rate that was in effect in 2017. Accompanying this reduction in rate was legislation that will provide refunds to taxpayers in 2022 of the greater of 12% of 2020 tax or $75 for each taxpayer and dependent. Both tax benefits are the result of large budget surpluses attributable to Idaho’s growing economy.
A major development for businesses operating across state lines is the 2022 change in the formula for apportioning income to Idaho. Prior to 2022, a multi-state business would apportion its nationwide income to Idaho using a formula based on three ratios — Idaho sales to total sales, and the same with payroll and property — then giving double-weight to the sales ratio. The 2022 legislation changes the formula to one based entirely on sales in Idaho compared to sales nationwide, so property and payroll are no longer relevant. One concern with the old formula was that other states have been moving to a single-factor formula based on sales, and there are often situations where are taxpayer is taxed on more than 100% of its income because of differences in the formulas. Also, the change to a single factor based on sales will generally benefit companies headquartered in Idaho or with a large presence here, because their Idaho property and payroll will not affect the apportionment, and sales out of state will be taxed to the destination state.
Another change in the apportionment process involves sales of intangible property or services. Prior to 2022, if services such as engineering services or sales of intangibles such as software were provided or completed out of state, they would be included as “Idaho sales” in the numerator of the sales fraction if a majority of the costs of providing the services or intangible was incurred in Idaho. That is often a difficult question to answer, and Idaho has now joined many other states which “site” such transactions at the destination of the customer. So if engineering services are provided by an Idaho firm to an Oregon client, the revenue from the services will not be included in the numerator of the Idaho sales ratio.
A third set of helpful changes during the legislative session was to clarify and expand the “work around” of the $10,000 limit on deduction of state and local income tax. As I reported in two articles last year¹, the 2021 Legislature passed a bill to allow pass-through entities to become subject to Idaho income tax, and allow partners or members a credit for the taxes paid. This has the effect of giving a full state tax deduction to owners of pass-through entities, just as corporations are able to deduct such taxes. The 2022 legislation broadened the types of entities that could benefit from the election. For instance, if one of the owners of a pass-through company was a non-profit entity, it would not have been feasible to make the election to be taxed at the pass-through entity level, since the credit for those taxes as passed through to the owners could not be used by the non-profit. The new changes address that issue and give more opportunities to take advantage of the work-around.
Property taxes continue to be a divisive issue in Idaho, and many legislators are determined to reform the system. There was no consensus on how to accomplish reform during the 2022 legislative session. We are likely to see more legislation next year.
Overall, the 2022 Legislature’s changes in the rates and structure of the income tax will be positive for Idaho businesses, especially for businesses operating in other states.
This article is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances. © Hawley Troxell Ennis & Hawley LLP all rights reserved.
