BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

 

In the matter of the amendment  of ARM 42.17.111, 42.17.134, 42.17.305, 42.17.601, 42.17.602, 42.17.603, 42.17.604, and 42.17.605 relating to withholding and estimated tax payments

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NOTICE OF PUBLIC HEARING ON PROPOSED AMENDMENT

 

TO: All Concerned Persons

 

1. On November 19, 2012, at 1:30 p.m., a public hearing will be held in the Third Floor Reception Area Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the amendment of the above-stated rules.

Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.

 

2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the Department of Revenue no later than 5 p.m., October 29, 2012, to advise us of the nature of the accommodation that you need. Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail canderson@mt.gov.

 

3. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

 

42.17.111 WHO MUST WITHHOLD MONTANA INCOME TAX AND WHO IS SUBJECT TO WITHHOLDING (1) through (6) remain the same.

(7) Wages paid to a resident of North Dakota for personal services rendered within Montana are not subject to withholding provided the employee has filed a form Form NR-2, certification Certification of North Dakota residency Residence, in accordance with ARM 42.17.134.

(8) Wages paid to the nonmilitary spouse of a military serviceperson for personal services rendered in Montana which meet the criteria in ARM 42.15.112, are not subject to withholding provided the employee has completed a Form MSR, Employee Certificate of Status under the Military Spouses Residency Relief Act.

 

AUTH: 15-30-2620, MCA

IMP: 15-30-2502, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.111.

The proposed amendments will add another example of when withholding from wages earned in Montana is not required.  The federal Military Spouse Residency Relief Act of 2009 provides that in certain circumstances the wages earned by the nonmilitary spouse of a military serviceperson stationed in Montana are not considered Montana wages.  The amendment informs the nonmilitary spouse and their employers of the provision and coordinates the rule with existing criteria outlined in ARM 42.15.112(6).

 

42.17.134 RECIPROCAL AGREEMENT - NORTH DAKOTA (1) An employer is not required to deduct Montana state income tax withholding on wages earned by residents of North Dakota under the provisions of the Income Tax and Withholding Tax Reciprocal Agreement between Montana and North Dakota. Relief from withholding is subject to all of the following provisions: in (2) through (5).

(a)(2) A North Dakota resident performing services in Montana for compensation must annually provide form Form NR-2, a certificate Certificate of North Dakota residency Residence, to his or her their employer before the employer may discontinue withholding on compensation earned in Montana. The certificate must be filed with the employer within 30 days of the start of employment. The certificate is valid only from the date filed to December 31 of the year in which filed. A new certificate to renew the exemption from withholding must be filed with the employer by the last day in February of each year. The certificate is rendered invalid if the employee changes his or her residence to any state other than North Dakota;.

(b)(3) Withholding from a North Dakota resident's compensation earned in Montana must be treated as if earned in North Dakota. If North Dakota requires withholding from the compensation, the North Dakota withholdings must be deducted from the compensation;.

(c)(4) A copy of the employee's form Form NR-2 must be submitted by the employer to the department after within 30 days of when it is provided to the employer in the case of new employment, or by March 31 if the form is renewing an exemption; and.

(d)(5) If the department determines that an employee's certificate is false or unsubstantiated, it may require an employer to disregard any claim to North Dakota residency and resume withholding on compensation earned in Montana.

 

AUTH: 15-30-2620, MCA

IMP:  15-30-2502, 15-30-2509, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.134.

The proposed amendments will provide timelines for the submission of Montana Form NR-2, Employee Certificate of North Dakota Residence, by employees to their employers and the subsequent submission of copies of the forms by the employers to the department. The inclusion of the timelines will help ease administrative burdens for all parties.

The department further proposes to amend the rule to make capitalization and punctuation corrections.

 

42.17.305 ESTIMATED TAX AND PAYMENT OF INSTALLMENTS 

(1) Except as provided in 15-30-2512, MCA, a taxpayer is required to pay at least 100% percent of their tax liability for the preceding tax year or 90% percent of their tax for the current tax year through withholding and estimated payments. If they do not, they will be liable for interest on the underpayment provided in 15-30-2512, MCA. In addition, unless the department grants a taxpayer an extension to pay an installment of estimated tax as provided in ARM 42.17.306, a taxpayer required to make installment payments of estimated tax who fails to timely pay an installment is liable for interest on the unpaid installment from the due date of the installment to the earlier of the date of payment or the due date of their income tax return, not including extensions, as provided in 15-1-216, MCA, and ARM 42.2.306.

(2) Taxpayers must may complete the form Form ESW, Montana Individual Estimated Income Tax Worksheet, to determine if they are required to make current year installment payments of estimated tax and, if necessary, to determine the amount. If a taxpayer's income fluctuates or is seasonal, employing the annualization method may lower the amount of one or more installments. A taxpayer using the optional annualization method must complete the form Form ESA, Annualization Worksheet.  Taxpayers are not required to file the estimated tax worksheet with their income tax return, but it is a tax record the taxpayer must retain and provide the department on request. Taxpayers using the annualization method must file form Form ESA with their income tax return. If the taxpayer files their individual income tax return electronically, the form Form ESA is a tax record the taxpayer must retain and provide the department on request.

(3) remains the same.

(4) If a taxpayer has not received estimated tax payment vouchers from the department before the first installment due date, the payment should be accompanied by a written statement setting forth that the payment is an estimated tax payment, the tax year, the due date of the installment, and the taxpayer's name, mailing address, and social security number and be:

(a) personally delivered to:

                    Montana Department of Revenue

                    Sam W. Mitchell Building

                    125 North Roberts, 3rd Floor

                    Helena, Montana; or

(b) mailed to:

                    Montana Department of Revenue

                    P.O. Box 6308

                    Helena, Montana 59604-6308.

(5) and (6) remain the same.

(7) If fewer than four installments are required, the applicable percentage of the required annual amount for each installment is increased. The applicable percentage per installment is as follows:

(a) 100% percent for one installment;

(b) 50% percent for two installments; and

(c) 33 1/3% percent for three installments.

 

Example 1: If the short tax year is the 10-month period from January 1 through October 31, the estimated tax must be paid in four installments, on April 15, June 15, September 15, and November 15. Each installment is 25% percent of the total payment required.

Example 2: If the short tax year is the 9-month period from January 1 through September 30, the estimated tax must be paid in three installments, on April 15, June 15, and October 15. With three installments, each installment is 33 1/3% percent of the total payment required.

 

AUTH: 15-30-2620, MCA

IMP:  15-30-2512, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.305.

The proposed amendments will remove the requirement that taxpayers must use a worksheet provided by the department to determine if they need to make estimated income tax payments for the current year and the amount.  While the department does provide Form ESW, Montana Individual Estimated Income Tax Worksheet, each year as a tool for taxpayers to use should they choose to, taxpayers also have the option to use alternative methods and calculations as long as the appropriate estimated payments are made.

The department further proposes to amend the rule to make capitalization and punctuation corrections.

 

42.17.601 ADVANCE PAYMENTS AND FURTHER DISTRIBUTIONS

(1) remains the same.

(2) Each remittor remitter who disburses funds that are owed to any person owning a royalty interest, overriding royalty interest, production payment, or any other nonworking interest in minerals produced in this state, is subject to the withholding requirement of 15-30-2536 15-30-2538, MCA.

(3) If a mineral is taken in-kind by a royalty owner, the take-in-kind owner must forward 6% percent of the net value of the mineral that was taken in-kind to the department unless they are exempt from withholding due to under 15-30-2539 or 15-31-102, MCA.

(4) If you are a remittor remitter and you are providing accounting services, and these accounting services include fulfilling the requirements of 15-30-2541, MCA, for more than one producer, you must remit separate withholding payments and submit a separate form Form RW-3, Montana Mineral Royalty Withholding Tax Reconciliation Return, for each producer.

 

AUTH:  15-30-2547, MCA

IMP:  15-30-2538, 15-30-2539, 15-30-2541, 15-31-102, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.601.

The proposed amendments will correct the misspelling of the word "remitter." The original legislation used the word "remittor."  However, the spelling of "remitter" is included in the applicable statutes, therefore, the department is proposing to update its rules to reflect the correct spelling.

The department further proposes to amend the rule to add and revise the implementing statutes and to make capitalization and punctuation corrections.

 

42.17.602 CLAIMING THE CREDIT FOR TAX WITHHELD (1) Claiming credit for the tax withheld shall be accomplished as follows:

(a) Credit may be claimed for the tax withheld on a Montana individual income tax return or a Montana corporation license tax return.

(b)  Taxpayers who are shareholders in a corporation taxed under Subchapter S of the IRC doing business in this state must maintain a copy of federal form Schedule K-1.  They may claim credit for the amount shown as their percentage share of the tax withheld from Montana net royalty payments by the corporation, limited liability company, or partnership.

(c)  An estate or trust is entitled to credit for the tax withheld in proportion to its share of federal distributable net income.  The remaining credit must be passed through to the beneficiaries in proportion to their respective shares of federal distributable net income of the estate or trust.  To claim the credit, the beneficiaries must maintain a copy of federal form Schedule K-1 and claim credit for the amount shown by the fiduciary as their percentage share of the tax withheld from Montana mineral production payments.

(d) Any person filing on a fiscal year ending other than December 31, must claim a credit for the withholding tax shown on the personal income tax return required to be filed during the year following the December closing period of the form Form RW-3, Montana Mineral Royalty Withholding Tax Reconciliation Return.

(e) Production taxes cannot be claimed as withholding for mineral royalty withholding or as income tax withholding.

 

AUTH: 15-30-2547, MCA

IMP:  15-30-2539, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.602.

The proposed amendments will revise the reference to the federal Schedule K-1 appropriately as a schedule rather than a form, and to make a capitalization revision on the name of a form.

 

42.17.603 APPLICABLE THRESHOLDS - CHANGE OF OWNERSHIP - PUBLICLY TRADED PARTNERSHIPS - NONPROFIT ORGANIZATIONS - EXEMPT ROYALTY OWNERS (1)  An oil and gas remittor is not required to withhold from their There is not a requirement to withhold from payments to royalty interest owners if the producing entity's production does not exceed 100,000 barrels of oil and 500 million cubic feet of gas, based on the previous three calendar years' average production reported to the Montana Board of Oil and Gas Conservation. For example, the department will calculate whether payments for an entity entity's production is required are subject to withhold withholding from their royalty interest owners for 2010 2013 by averaging the production numbers for calendar years 2006, 2007, and 2008 2009, 2010, and 2011 and comparing this average to the production exemption limits.

(2) If an entity does not have three years of recent mineral production records, the remittor remitter may provide the department with information supporting the exemption from the withholding requirements of 15-30-2536, MCA. The department shall review this information to determine if an exemption is warranted and notify the remittor remitter of the determination.

(3) On or before September 15 of each year, the department shall notify all oil and gas producers of their requirements as it relates to the provisions of 15-30-2536 15-30-2538 and 15-30-2539, MCA. The department will notify all other mineral producers by September 15 only if they are required to withhold.

(4) If a person that who is required to withhold on behalf of their royalty interest owners sells their mineral interests during the year and ceases to be the remittor remitter, the person that acquired the mineral interests becomes the remittor remitter and must continue to withhold 6% percent of the net royalty payments from the royalty interest owners subject to the withholding requirements of 15-30-2536 15-30-2538, MCA.

(5)  If a remittor remitter produces both oil and gas, and only one resource meets the requirements for withholding as provided in 15-30-2539, MCA, the withholding provisions apply to both oil and gas regardless of the production volumes of the other resource that does not meet the requirements of 15-30-2539, MCA.

(6) If a person, not previously extracting resources in the state, begins extracting from new or existing sources of natural resources in Montana (i.e., newly drilled oil or gas wells or a new mine), that person is required to withhold 6% percent of the net royalty payments from the royalty interest owners subject to the withholding requirements of 15-30-2536 15-30-2538, MCA.

(7) The person described in (6) that extracts minerals may not be required to withhold on net royalty payments from their royalty interest owners if the person can provide information that satisfies the department that the new producing property will not meet the threshold requirements established in 15-30-2539, MCA.

(8) All persons that extract minerals other than oil and gas must withhold 6% percent of the net royalty payments of all royalty interest owners subject to the withholding requirements of 15-30-2536 15-30-2538, MCA.

(9)(8) The person described in (8)(7) may not be required to withhold net royalty payments from their royalty interest owners if the person can provide information that satisfies the department that the net royalty payments are immaterial.

(a) The department has defined an entity that has immaterial net royalty payments as an entity that has production amounts for minerals, other than oil and gas, with a value less than $5,000,000 $5 million. The only filing requirement for this type of entity is the filing of the Form RW-3 by February 28 of the following year along with a listing of all royalty recipients. The $5,000,000 $5 million value will be based on a three-year average of production value reported to the department's Business Tax and Valuation Bureau. For example, the department will calculate whether an entity is required to withhold from their royalty interest owners for 2010 2013 by averaging the valuation reported for 2006, 2007, and 2008 2009, 2010, and 2011.

(10)(9) Section 15-30-2539, MCA, allows for a publicly traded partnership to be exempt from the withholding requirements of 15-30-2536 through 15-30-2547, MCA, provided the publicly traded partnership, who that is a royalty owner, submits a report to both the remittor remitter and the department. The report, which can be in the form of a letter, must contain the publicly traded partnership's letterhead and state that the partnership is publicly traded and the partnership requests exemption from 15-30-2536 through 15-30-2547, MCA. The request must be received by the remittor remitter and the department prior to November 1 of the year prior to the calendar year in which the partnership requests exemption. Upon receipt of the report, the department will notify the partnership and the remittor remitter of either acceptance or denial of the request within thirty 30 days. The election does not need to be repeated annually unless requested by the department.

(11)(10) Section 15-30-2539, MCA, allows for an organization that is exempt from taxation under 15-31-102, MCA, to be exempt from the withholding requirements of 15-30-2536 through 15-30-2547, MCA, provided the exempt organization, who that is a royalty owner, submits a report to both the remittor remitter and the department. The report, which can be in the form of a letter, must contain the exempt organization's letterhead and requests exemption from 15-30-2536 through 15-30-2547, MCA. The request must be received by the remittor remitter and the department prior to November 1 of the year prior to the calendar year in which the exempt organization requests exemption. Upon receipt of the report, the department shall notify the exempt organization and the remittor remitter of either acceptance or denial of the request within thirty days. The election does not need to be repeated annually unless requested by the department.

(11) The exception provided in 15-30-2539, MCA, for payments to a federally recognized Indian tribe, applies to all mineral production described in the Mineral Leasing Act of 1939.

(12) According to 15-30-2539, MCA, the department grants remittors remitters the authority to forego withholding the tax from royalty owners who meet the following qualifications:

(a) the amount of the royalty interest payment is less than $2,000 per year; or

(b) less than $166 per month.

(13) The remittor remitter that does not withhold from royalty interest owners pursuant to (12) may, upon request from the department, be required to provide a list of the royalty interest owners.

 

AUTH: 15-30-2547, MCA

IMP:  15-30-2538, 15-30-2539, 15-30-3540, 15-30-2541, 15-30-2542, 15-30-2543, 15-30-2544, 15-30-2545, 15-30-2546, 15-30-2547, 15-31-102, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.603.

The proposed amendments will outline that the determination of whether royalty payments are subject to withholding is based on the producing entity's production levels. In some cases, the entity ultimately responsible for paying the royalty owners is not the producing entity and may not be directly producing.  The proposed changes more specifically state that this does not relieve the remitter from the withholding requirement.

The proposed amendments will also update the years used in the examples to more current years so that they are more relevant and understandable. Further, the proposed amendments will delete (7) because that section essentially duplicates (2) and is therefore redundant and confusing.

The department further proposes to add language regarding the exemption from withholding for federally recognized Indian tribes.  The new language will address some current confusion and more specifically outline that the exemption applies to all production described in the Mineral Leasing Act of 1939, not simply oil and gas.

Finally, the proposed amendments to the rule will correct the misspelling of the word "remitter," add and revise implementing statutes, and make capitalization and punctuation corrections.

 

42.17.604 REGISTRATION FOR WITHHOLDING (1) through (4) remain the same.

(5) Not being registered does not relieve a remittor remitter from the collection and reporting requirements.

 

AUTH:  15-30-2547, MCA

IMP:  15-30-2538, 15-30-2541, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.604.

The proposed amendment will correct the misspelling of the word "remitter."

 

42.17.605 FILING REQUIREMENTS (1) The following forms are to be completed and filed in accordance with instructions provided by the department:

(a) Form RW-1, Mineral Royalty Withholding Payment Voucher, must be filed quarterly unless the department establishes that the entity is exempt from the withholding requirements of 15-30-2536 15-30-2538, MCA. A remittor remitter may request to file a form Form RW-1 on an accelerated basis. The remittor remitter must receive approval from the department before remitting the withholding tax on a more frequent basis than quarterly;

(b) A remittor remitter who has no withholding to remit for a remittance period shall, on or before the due date, send a payment voucher showing that a zero amount is being remitted;

(c) Form RW-3, Montana Annual Mineral Royalty Withholding Tax Reconciliation, must be filed on or before February 28 of each year. Form RW-3 must be accompanied by copies of each royalty owner's withholding statements on federal form 1099-MISC, Miscellaneous Income, or Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding;

(d) Form 1099-MISC, Miscellaneous Income, or Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, shall be furnished by the remittor remitter to each person who is entitled to a credit for taxes withheld each calendar year before January 31 of each year; and

(e) Each remittor remitter that is exempt from withholding is still required to file the form Form RW-3 with the department along with a copy of form Form 1099-MISC, Miscellaneous Income, or Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, for every recipient of royalties. These reports are due on or before February 28 of each year.; and

(f) A substitute for Form 1099-MISC may be filed with the department provided it:

(i) generally follows the guidelines in federal Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns; and

(ii) reports all the information regarding Montana royalty payments as required in 15-30-2543, MCA, and the rules in this subchapter.

(2) remains the same.

(3) If a remittor remitter does not withhold on a royalty interest owner who in the previous year met the exemption requirement in 15-30-2539, MCA, but exceeded that requirement in the current year, the department will not penalize the remittor remitter for the lack of withholding in that current year.

 

AUTH: 15-30-2547, MCA

IMP:  15-30-2538, 15-30-2539, 15-30-2541, 15-30-2543, 15-30-2544, MCA

 

REASONABLE NECESSITY: As required in 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.17.605.

The proposed amendment will allow for the federal Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, to be used to report royalty income and withholding.  Reporting entities may use Form 1042-S rather than Form 1099-MISC in certain cases.  The proposed amendment will address confusion regarding which forms are acceptable for reporting to Montana.

Additionally, the proposed amendments will provide reporting entities with better guidance about the manner in which the required information is submitted.  The department understands that the manner in which an entity submits information related to royalty payments to the federal government may not always present the information required to be reported to Montana.  By providing guidelines for alternative formats in the rule, reporting entities will gain assurance that they are reporting in an acceptable format and the department will be able to use the information more efficiently.

Finally, the proposed amendments to the rule will correct the misspelling of the word "remitter," add and revise implementing statutes, and make capitalization and punctuation corrections.

 

4. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail canderson@mt.gov and must be received no later than November 27, 2012.

 

5. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

 

6. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Select the "Legal Resources" link in the left hand column, and click on the "Rules" link within to view the options under the "Current Rule Actions – Published Notices" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. While the department also strives to keep its web site accessible at all times, in some instances it may be temporarily unavailable due to system maintenance or technical problems.

 

7. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notice regarding particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. Such written request may be mailed or delivered to the person in 4 above or faxed to the office at (406) 444-4375, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

 

8. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

 

 

/s/ Cleo Anderson                            /s/ Dan R. Bucks

CLEO ANDERSON                         DAN R. BUCKS

Rule Reviewer                                 Director of Revenue

 

Certified to Secretary of State October 1, 2012