- In late April, Kansas Governor Laura Kelly signed omnibus tax legislation into law.
- The bill provides for a reduction in the corporate tax rate in 2028 provided tax receipt revenue reaches a certain threshold.
- It also adopts a single sales factor apportionment formula, expands personal income tax exemptions, and exempts certain classes of property from property tax.
Background
This alert will summarize key provisions of the omnibus tax legislation enacted in Kansas, House Bill 2331, in April.
Corporate Rate Reduction
The enacted bill allows the Kansas Secretary of Revenue to reduce the tax rate, rounded down to the nearest .1%, at the end of fiscal year 2028. The reduction will be calculated using the amount that corporate tax receipts in that year exceeded prior year corporate tax receipts and converted by the Secretary into a permanent rate reduction. The Secretary is required to publish the reduced rate by October 1, 2028, to be effective for tax years beginning after December 31, 2028.
Single Sales Factor
The law changes Kansas’ apportionment provisions from what was a three factor (property, payroll, and sales) formula to a single sales factor. This change applies to multistate corporations, partnerships, S corporations, and financial institutions and is effective for tax year beginning on or after January 1, 2027.
The bill also contains a unique provision for publicly traded companies. It creates a deferred tax impact deduction for those companies to ameliorate any potential adverse effect that the change to single factor will have on deferred tax assets and deferred tax liabilities (reductions in net deferred tax assets, increases in net deferred tax liabilities, or a net change from a deferred tax asset to a deferred tax liability). The adverse change is divided by the Kansas tax rate in effect for the year in question related to the change and then further divided by the Kansas apportionment factor for the year in question. Taxpayers are required to make this calculation based upon the change as of the end of the tax year prior to tax year 2025.
This so-called “deferred tax impact deduction” can be taken in 10% increments for tax years beginning on or after January 1, 2035. Taxpayers filing on combined reports are required to make this calculation on a unitary basis.
Any unused deferred tax impact deduction can be carried forward indefinitely. Taxpayers must file with the Department of Revenue a summary (on a form to be prescribed by the Department), by July 1, 2027, of the amount of the deferred tax impact deduction.
Market Sourcing
The legislation also changes Kansas from a costs of performance state to a market sourcing state for general business corporations, partnerships, and S corporations for tax years beginning after December 31, 2026. Sourcing rules for financial institutions remain unchanged, with the caveat that “other receipts” under the financial apportionment statute will be market sourced since that section of the financial institution apportionment statute refers to the general, now market-sourced, apportionment statute.
Sales will be sourced to Kansas for apportionment purposes if the “…taxpayer’s market for the sales…” is within Kansas. Services are considered Kansas sales if they are delivered to a location in Kansas. Revenue from intangibles is sourced to Kansas to the extent that the intangible is used in the state; if the intangible is used to market to Kansas consumers, the revenue associated with that intangible would be considered a Kansas sale if the underlying good or service was purchased by a consumer in the state. Revenue associated with franchise rights that include parts or all of Kansas in the geographic area granted are considered Kansas sales. Taxpayers can reasonably approximate the sourcing for these types of revenue if the market cannot be determined; the receipts are thrown out if the taxpayer cannot make a reasonable approximation. Interest income is sourced to Kansas if it arises out of a loan secured by real property located in Kansas. Interest income unsecured by real property is reflected in the Kansas numerator if the borrower is located in Kansas. Finally, dividend revenue is sourced to the state of commercial domicile of the payor.
Property Tax Relief
The legislation exempts off-road vehicles, certain other types of vehicles, trailers, and marine equipment from property taxation as of January 1, 2026.
Increased Personal Exemption for Head of Household
The legislation provides an increased personal exemption of $2,320 for those filing individual income tax returns as heads of household for tax years 2024 and thereafter.
How Forvis Mazars Can Help
Forvis Mazars can help you navigate the consequences of the switch to the single sales factor and, if applicable, help you understand the implications of the deferred tax impact deduction. Additionally, market sourcing considerations are state-specific. We can help you understand the Kansas specific rules, and the similarities and differences to other market sourcing states in which you may be filling.