Which Ohio, Michigan, and Texas business taxes could a corporation deduct when computing Kansas corporate income tax?

Plain-English summary

K.S.A. 79-32,138(b) required a corporation to add back state and local taxes imposed on or measured by income, plus fees paid in lieu of an income tax, when those amounts had been deducted federally. The taxpayer asked how that rule applied to several business taxes that did not fit neatly into a single category.

The Department's answers were:

The dividing principle was the tax base: income-based taxes and income-tax substitutes were added back, while the listed net-worth and gross-receipts-style components were deductible under the classifications the Department gave.

What this means for you

Multistate corporations

Analyze each foreign tax component separately. A single return or tax name can contain both a deductible base and an income-based portion that Kansas requires you to add back.

Corporate tax preparers

Do not carry these labels forward without checking the tax's current statute and computation. Ohio, Michigan, and Texas changed several of these regimes after this letter.

Tax provision teams

Document why a foreign levy is or is not “imposed on or measured by income” or a fee in lieu of income tax. The Department's component-by-component treatment shows that the economic label alone is not enough.

Common questions

Q: Was the entire Ohio Franchise Tax deductible?
A: No. The net-worth portion was deductible; the income-based portion was not.

Q: Were Ohio CAT and Michigan SBT deductible?
A: Yes, under the letter's 2009 classifications.

Q: How was the Michigan Business Tax split?
A: The income portion was not deductible, while the modified-gross-receipts portion was deductible.

Q: Was the Texas Revised Margins Tax deductible?
A: Not when determined by deducting cost of goods sold or compensation from gross receipts.

Citations and references

• K.S.A. 79-32,138(b) — Kansas addback for state and local income taxes and fees in lieu of income tax
• Kansas Opinion Letter O-2003-001 — prior Texas Franchise Tax classification referenced in the letter
• Kansas Opinion Letter O-2008-004 — Texas Revised Margins Tax classification referenced in the letter

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2009-005

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

March 24, 2009

XXXXX
XXXXX
XXXXX
XXXXX

Re: Kansas Income Tax

Dear XXXXX:

Your correspondence of January 9, 2009 has been referred to me for response. Thank you for your inquiry and please accept my apologies for the delay in responding.

In your e-mail you inquire as to the deductibility of certain items for corporate income tax purposes. Your questions, and our responses, are set forth below.

Per KSA Sec. 79-32,138(b), state and local taxes imposed on or measured by income or fees in lieu of income tax are not deductible for Kansas corporate income tax purposes. To the extent such taxes are deducted on the federal return, they must be added back to arrive at Kansas net income. Some state taxes from other jurisdictions do not neatly fall into this description. I would like to know whether the following taxes are deductible for Kansas corporate income tax purposes:

1) Ohio Franchise Tax
net worth portion - deductible
income based portion - not deductible

2) Ohio Commercial Activity Tax (CAT)
deductible

3) Michigan Single Business Tax (SBT)
deductible

4) Michigan Business Tax (MBT)
income based portion-not deductible
modified gross receipts portion-deductible

5) Texas Franchise Tax, KS Opinion Letter O-2003-001
deductible

6) Texas Revised Margins Tax, KS Opinion Letter O-2008-004, 9/2/08
not deductible if determined by deducting cost of goods sold or
compensation from gross receipts

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

NOTE: This opinion letter is based solely on the facts provided in your request for advice. If material facts or information were not disclosed this letter is null and void. This letter will be revoked without further action by the Department if the statutes, administrative regulations, published revenue rulings, or court decisions that materially affect this opinion are changed.

Date Composed: 03/30/2009 Date Modified: 03/30/2009

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