New law on taxing methods hailed as big win for businesses
by Ted Carter
Published: April 18,2014
The Mississippi Economic Council completed a victory lap over passage of its priority tax legislation by having Gov. Phil Bryant sign House Bill 799 at the close of the business organization’s annual meeting and luncheon last Thursday.
At the prodding of the MEC and other business groups, lawmakers crafted HB799 to counter the effects of a Mississippi Supreme Court ruling last summer that upheld the authority of the state Department of Revenue to use an alternative market-based method in determining a multistate company’s state income taxes.
The legal appeal by Equifax Credit Information Services ended with the court upholding the DOR’s alternative tax apportionment and a resulting three-year tax bill of over $700,000 for the Georgia-based company. Under Mississippi’s standard formula, Equifax would have owed zero income taxes.
In the weeks leading up to passage of Rep. Jeff Smith’s HB799, the MEC sought to rally support through characterizations of the DOR as an “out-of-control” state agency that must be “reined-in.”
Having achieved victory, MEC president and CEO Blake Wilson toned down the rhetoric in remarks to the MEC luncheons audience last week, saying only that the state’s business taxing system was “out-of-whack” and HB799 represented a needed correction.
Bryant, in signing the HB799, said the legislation is a victory for businesses seeking “clarity” and “certainty” in how the state assesses their taxes.
The DOR, on the other hand, says it will have to get more clarity on provisions of the new law, some of which it predicts may have to come from the courts.
The agency further warned that the measure will cost the General Fund upward of $100 million annually. An earlier version of HB799 that had tougher provisions for the DOR’s use of alternative apportionment carried a yearly cost estimate of more than $300 million. A staff analysis by the Legislature’s Joint Committee on Performance Evaluation and Expenditure Review concluded the DOR’s $300-million projection appeared “to have a reasonable basis.”
HB799 sets new conditions for the DOR to follow in applying alternative methods of taxation. In the instance of Mississippi, the alternative approach would be the market method which apportions a company’s tax liability on revenues earned in the state. Legislators refused in 2012 to designate the market method as a standard option, but the DOR has applied it on occasion and says that a couple dozen businesses have asked for the method to be applied in assessing their taxes. Those businesses must now justify use of the alternative method the same way the DOR will have to.
Mississippi law has long authorized the cost-performance method as well as a “time-spent” method for service companies. The approaches allow a multistate company to place the bulk of its tax liabilities in the state in which it incurred the expenses or expended the time earning the money.
HB799 still allows the DOR to use alternative apportionment such as the market method but only when it shows with a “preponderance of evidence” the method best reflects a taxpayer’s business activity in the state. An earlier version of the bill set a much higher standard of “clear and convincing evidence.”
A further condition requires that the alternative method be invoked only in “limited and unique, non-recurring circumstances — a standard the DOR says will be difficult to apply considering that it would prohibit using a market-based apportionment on a multistate company that earns money in Mississippi year after year. “It is not clear under what circumstances a taxpayer with on-going operations in this state could be ‘limited’, ‘unique’ or ‘nonrecurring,’” DOR spokeswoman Kathy Waterbury said in an email.
Looking ahead, the DOR says it expects the new law to “substantially” reduce its use of alternative apportionment. While critics accused the DOR of using alternative apportionment as a spreadsheet to choose the highest liability, the agency insists it relies on the alternative method “only when the standard apportionment formula does not fairly represent the taxpayer’s activity in the state.”
Also after Jan. 1, the DOR can’t direct multistate companies to provide combined tax returns unless the agency can show a multistate company “improperly” shifted taxable revenue earned in the state to an affiliated entity in another state. Waterbury said the agency will need clarification on that provision.
“We are unaware of any time when shifting Mississippi income to another state is proper,” she said. “What this does, in effect, is establish a separate and vague standard for requiring a combined or consolidated return.”
HB799 also provides a phased-in reduction of interest charged on income tax penalties from 1 percent to.5 percent. The interest was set years ago during a period of high interest rates.
Another provision limits the assessment of interest to the unpaid amount of a tax assessment rather than the full tax bill.
Rep. Smith’s HB799 was reconciled in a conference committee with Senate Bill 2487 introduced by Sen. Joey Fillingane.
The DOR said its data show 81 of the top 100 corporate taxpayers in the state are based outside Mississippi
Corporate income taxes made up 8.3 percent of the state’s total tax collections in 2013, according to the DOR.
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