DOR: State’s general fund stands to lose more than $100 million annually through the new tax apportionment rules
by Ted Carter
Published: April 7,2014
A bill to limit how and when the Mississippi Department of Revenue can use a market-based taxing method in calculating the tax bills of multistate businesses in the state passed the Legislature Tuesday morning.
Legislators also put limits on the DOR’s authority to demand multistate companies provide combined tax returns. The DOR has insisted on authority to seek combined returns based on its belief that many of the multistate companies in the state divert taxable income to out-of-state headquarters or affiliate operations outside Mississippi.
The new legislation sets new conditions on the the DOR’s selection of a taxing method based on the agency’s determination that a particular method most fairly reflects the taxpayer’s business activity in the state.
The new rules are to go into effect Jan. 1, 2015.
The DOR said after the adoption of the legislation the state’s general fund stands to lose more than $100 million annually through the new apportionment rules. That amount is considerably less than the more than $300 million DOR said an earlier version of the bill would cost the state.
Business groups such as the Mississippi Economic Council, which serves as the state’s Chamber of Commerce, say the legislation will undo some of the damage to Mississippi’s reputation for business friendliness caused by last summer’s state Supreme Court ruling involving Equifax Credit Reporting Services. In that ruling, the court upheld the DOR’s use of the market-based apportionment for the Georgia-based Equifax, bringing the company’s tax bill from zero to over $700,000.
Mississippi for decades has authorized the standard Uniform Division of Income for Tax Purposes Act (UDITPA) that calculates taxes through a performance-based approach. The DOR says in many instances a market-based approach that calculates taxes based on revenue earned in the state is the method that best reflects a company’s tax liabilities in the state.
The DOR can still apply the market-based apportionment provided it meets two tests: A “preponderance” of the evidence shows the method best reflects the business taxpayer’s tax liability and that the method is used only in “unique, nonrecurring circumstances.”
The bills that went to a House-Senate conference committee (HB799 and SB2487) had set a standard of “clear and convincing” evidence for applying the alternative taxing method.
The Mississippi Economic Council said replacing the “clear and convincing” requirement with one that specifies a “preponderance” of the evidence marked a huge compromise.
While the DOR agrees the move from “clear and convincing” to “preponderance” was a positive step, limits on when the alternative apportionment method can be applied severely tie the revenue department’s hands. The legislation, said DOR spokeswoman Kathy Waterbury, limits the use of the market-based taxing method to “only those taxpayers who do not have an ongoing business in the state.”
Most businesses headquartered out of state with operations in Mississippi do business here year after year, Waterbury noted. So applying the “nonrecurring” standard would put them off limits to an alternative tax apportionment method, she said.
“The language is a concern” because of its absence of clarity, she added.
“Vague terms lead to litigation.”
By contrast, the MEC says the bill passed Tuesday gives sorely needed “certainty” to businesses, regardless of whether they are based in or out of the state. “Now they know they will get a fair hearing,” said Scott Waller, COO of the MEC.
The new rules also fall in line with the regulations of most other states, Waller said.
The bill also restricts the assessment of penalties to the amount of tax in dispute, rather than the entire tax amount. It further phases in a reduction in interest on the penalties from 1 percent to .5 percent over several years.
The DOR said its data show 81 of the top 100 corporate taxpayers in the state are based outside Mississippi. Many out-of-state companies are “moving Mississippi income out of state,” Waterbury claimed.
Hence, it is important that DOR do what it can to prevent that, she added.
But stopping the practice just got much more difficult, according to Waterbury.
The DOR must now prove the multistate corporation shifted the income improperly, she said. “We have to ask, ‘What is improper shifting of income?’ We are unaware of any time when shifting Mississippi income to another state is proper. What this does, in effect, is establish a separate and vague standard for requiring a combined or consolidated return.”
At the Tax Foundation, a non-partisan think tank based in Washington, economist Scott Drenkard said many states are moving to market-based tax apportionment to get out-of-state companies to pay a larger share of taxes. They companies are, after all, using a state’s court system, road system, public safety system and other resources. “But overly broad application of tax apportionment methods can cause a state to tax corporations that don’t owe the state anything,” he said.
In the instance of Mississippi, the issue “could be a whole lot of hand wringing for what is not a lot of collections,” Drenkard said, and noted Tax Foundation data for 2011, the most recent year available, show that corporate tax collections accounted for only 3.8 percent of the state’s total tax collections.
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