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Kansas Department of Revenue Double-Taxes Banks
The Kansas Department of Revenue (DOR) has taken a unique position that may subject banks to an income tax—twice.
Kansas imposes a corporate income tax and privilege tax measured by net income on financial institutions. For financial institutions, the privilege tax is imposed in lieu of the regular corporate income tax. For general corporations, the normal tax rate is 4 percent of net income and the surtax is 3 percent of net income in excess of $50,000. For financial institutions, the normal tax rate is 4.25 percent of net income and the surtax is 2.125 percent of net income in excess of $25,000.
Kansas’ mandatory combined reporting regime excludes financial institutions from the combined group when the privilege tax to which they’re subject requires a different apportionment methodology. However, apart from the combined reporting regime, if two or more corporations file a consolidated federal tax return, and if all of them derive all of their income from Kansas sources, they must file consolidated Kansas returns.
A bank holding company and its subsidiaries will often file a federal consolidated group income tax return. Each subsidiary is viewed and reports as a separate legal and accounting entity for regulatory purposes. Accordingly, each subsidiary’s applicable income taxes, reflecting either an expense or benefit, should be recorded as if the institution had filed on a separate entity basis. Bank subsidiaries and bank holding companies must be included in the consolidated Kansas income tax return if such a return is required.
The Kansas DOR recently asserted that if a bank subsidiary and a bank holding company are included in a mandatory Kansas consolidated return, Kansas may subject the bank subsidiary’s income to both the Kansas privilege tax for financial institutions and the corporate income tax. In essence, the bank subsidiary would be subject to the privilege tax by doing business in Kansas, but the consolidated group, which includes the bank subsidiary and its income, also would be subject to the corporate income tax, because the bank holding company would be subject to the corporate income tax. Once the consolidated group files its Kansas K-120, the starting point for taxable income would be the group’s federal consolidated income and no relief (either in the form of a subtraction modification or a credit for taxes paid) would be granted for the bank subsidiaries’ income taxed under the privilege tax.
As most federal tax practitioners are aware, the modern consolidated return regime is highly complex and expressed through myriad regulations. States have long had issues with interpreting and conforming to federal income tax provisions related to consolidated returns. The Kansas DOR’s position raises a variety of concerns ranging from statutory construction to fair tax policy, and taxpayers should examine this issue carefully.
For additional guidance on how the Kansas position may affect your business, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.