Sununu signs switch in how business profits tax is calculated

Market-based sourcing change would aid some New Hampshire-based companies

Gov. Chris Sununu has signed a bill into law that will largely lower corporate taxes for multistate service companies based in New Hampshire and raise them for those out of state.

But the bill falls short of a much bigger tax reform that would have done the same for all multistate companies, a change that is included in the vetoed trailer bill to the vetoed budget.

Senate Bill 190 would use market-based sourcing to figure out the business profits tax for companies with customers in different states. It most concerns accounting, engineering, consulting firms, construction companies and real estate agencies — professional businesses that primarily sell their services regionally, across neighboring state lines. But it also could affect some companies that now sell what was once tangible, like software and music and movies on discs that are now sold via a streaming service or a download.

SB 190 would switch the way New Hampshire apportions a company’s profits – for tax purposes, to determine the BPT Tax owed – based on the sales of services from different states, starting in 2021.

Under the old method, the tax was based on sales where most of the cost of performance of those services occurred – the home state of the business. Under market-based sourcing, New Hampshire would look to where the buyer, not the seller, is located. New Hampshire would join 30 other states that have already made the switch.

Currently, if a New Hampshire-based company provides services to a customer in a state with market-based sourcing, that company pays taxes twice on the same income. They pay the BPT to their home state based on where the seller is located (New Hampshire) and the corporate tax of the other state that considers where the customer is located.

With a switch to market-based sourcing, the tax would only apply to the sales in the customer’s state.

Single sales factor

If a company is based in a state still using the cost of performance, it would be in the same position that New Hampshire companies currently are in now, and will start paying the BPT based on sales to Granite State customers, as well as to its home state.

The state’s tax gain from out-of-state companies will exceed the revenue losses from New Hampshire companies by $10 million in the first six months of 2021 (the last six months of the two years being funded in the budget that was vetoed by Governor Sununu), according to estimates of the state Department of Revenue Administration.

House Bill 2, the vetoed trailer bill contains the language in SB 190 but also contains an ever bigger change, using a single sales factor, which only consider sales in determining a company’s tax liability, not payroll and property, as the calculation includes now.

The effect, according to the DRA, would be bigger and more volatile, since sales go up and down more than payroll and property.