The Multistate Tax Commission Executive Committee authorized the State Tax Compliance Initiative in April 2003 to develop methods of improving compliance with State taxes in three key areas:
1. Business income tax sheltering,
2. Pass-through entity shareholder income reporting, and
3. Sales and use tax compliance
The Compliance Steering Committee was established by the Executive Committee to make recommendations as to how to deal with these major issues. In the summer of 2004, representatives from thirteen states met to make recommendations regarding the first issue, business income tax sheltering. Here are a few of the more interesting highlights:
No Corporate Income Tax
Currently, forty-four states and the District of Columbia tax the net income of corporations that is earned within their states. There are a few states that tax the activities of corporations using tax structures that are closely related to the net income tax. These include the Michigan Single Business Tax, the Texas Franchise tax, and the Washington Business and Occupations Tax. So, who doesn’t tax corporate income? Nevada, South Dakota, and Wyoming.
Many states allow or require the use of combined reporting. Combined reporting generally allows the income from intercompany transactions to be eliminated or deferred and only taken into account when the asset is sold to an entity outside of the combined reporting group. This has proven to be a great tax advantage for corporations that have several smaller companies or holding companies. The Steering Committee recommended that combined reporting and the various calculation processes employed by states be examined in greater detail to make sure that income from these sub-companies is being correctly classified.
State tax statutes could contain a requirement that corporate taxpayers account for their reporting of income to all states in conjunction with the filing of their tax return. This would allow a state to compare a taxpayer’s filing position in their state with the filing position taken in a sister state with comparable laws. It could be shared amongst the states to ensure that taxpayers have correctly disclosed their filing positions.
And there’s more…
Other major areas in which the committee made recommendations included the role of intangible holding companies, the expense disallowance statute, the income realization requirement, and the arm’s length audit, just to name a few.
This is just the first of many meetings to occur over the next few years. However, we may see some states changing their corporate income tax laws and reporting guidelines based on the Multistate Tax Commission’s final recommendations. For now, most people can only take a wait and see approach.