A price tag of $7.5 million this year and $25 million next year accompany a pair of pro-business tax apportionment bills that have cleared Mississippi’s House and Senate with overwhelming support.
The Republican-sponsored measures, HB 799 and SB 2487, force the Department of Revenue’s to justify basing a multistate company’s taxes on revenue generated in the state. The measure also requires the taxpayer to do the same should it want the revenue standard used.
The bills are also aimed getting restoring a national trade association for multistate corporations’ high grade for tax fairness after last summer’s state Supreme Court ruling that upheld the DOR’s authority to tax an out-of-state company on money it made in the state. Critics of Mississippi’s current set up say
In assessing the cost of HB799 and SB 2487, the Department of Revenue said the $7.5 million this year and $25 million next year are only the down payment the state would have to make to restore the B+ grade the Council on State Taxation, or COST. The nonprofit trade association of more than 600 multistate corporations dropped the state’s grade for “The Best and Worst of State Tax Administration” to C+ after Mississippi’s Supreme Court upheld the DOR’s use of a market-based standard for assessing Atlanta’s Equifax Credit Information Services’ tax liability.
Basing the tax on revenue from services sold in the state marked a departure from the state’s statutory “cost of performance” standard. The market-based standard, which calculated tax owed through revenue generated in the state, upped Equifax’s tax bill from zero to $700,000.
The DOR projects the bills designed to make it harder for the state to assess taxes on multistate businesses based on revenue earned would ultimately cost the state treasury more than $300 million – a figure the Mississippi Economic Council says is vastly inflated.
COST last month cited the Equifax case in a letter to legislative leaders and indicated a grade reassessment would come with adoption of legislation to diminish the effects of the Equifax ruling.
Equifax sought to use the cost-performance method in which sales of services are sourced to the state where most of the activity occurs/costs were borne. In Equifax’s case, the sourcing – or bearing of costs – did not occur in Mississippi, thus the zero tax liability.
Meanwhile, the bills to undo the perceived damage from the Equifax case are headed for the House-Senate conference committee. HB 799, introduced by Rep. Jeff Smith, won House approval earlier this month by a 113-2 vote. The companion bill from Sen. Joey Fillingane, SB 2487, received Senate approval last Thursday on a 46-1 vote, with five senators either absent or not voting.
The bills would force the DOR to present “clear and convincing evidence” that the standard “cost-of-performance-based” apportionment method does not fairly represent the taxpayer’s activity. The measures would also require the DOR to present “clear and convincing evidence” to support requests for out-of-state companies with operations in Mississippi to provide the DOR with combined tax returns.
Fillingane, in an interview last week, conceded his legislation would entail “significant” costs to the state’s treasury, but insisted the expense is necessary to protect the state’s reputation as friendly to business. He further noted he expects the costs could come down considerably in the final bill through negotiations between the MEC and DOR.
Scott Waller, MEC executive VP & COO, said the costs would be shaved to a few million dollars, essentially the costs involved in lowering interest assessments from 1 percent to one-half percent. The DOR projects a cost of $38,473,594 in lost interest in fiscal 2015, however.
Waller said the DOR’s listing of $100 million as the cost of lost productivity by having revenue agents hand deliver tax dispute notices was moot from the start. Neither of the bills required a hand delivery.
The Smith and Fillingane measures also specify changes to the assessment of interest and penalties for corporate taxpayers that file taxes based on the statutory standard but later are subjected to a different standard by the DOR. Monthly interest would be lowered from 1 percent to one-half percent and penalties would be assessed only on the amount of tax in dispute rather including tax amounts already paid.
Another provision eliminates the requirement that a business challenging a tax bill post a bond or be forced to “pay under protest.”
Here is what the DOR projects the entire costs will be:
• $7,500,000 loss to the remainder FY 14 General Fund from Corporate Alternative Apportionment;
• $9,618,398 loss to remainder of FY 14 GF due to reduction in Interest rate;
• $9,823,332 loss to the remainder FY14 General Fund due to changes in penalties;
• $25,000,000 loss to the FY 15 and future General Fund from Corporate Alternative Apportionment;
• $38,473,594 loss to the FY 15 (and future) GF due to reduction in interest rate;
• $39,293,170 loss to the FY 15 and future General Fund due to changes in penalties;
• $2,660,000 additional annual cost to DOR for Certified Mailings;
• $500,000 additional cost to notice the taxpayer and his lawyer;
• $100 million of revenue agent productivity lost to hand-delivering;
• $150 million lost production (due to lack of savings clause, the effective date and section 19. This will affect both FY 14 and FY 15);
• $4,000,000 additional annual cost to hire enough people to refund “customers” sales taxes.
The MEC’s Waller said the $150 million cost in lost production noted by the DOR would be erased by inserting the “savings clause” into the bills, which the proponents are willing to do. That way only tax challenges that arise on or after the date specified in the savings clause would be part of the cost incurred, rather any and all disputes now in the pipeline.
“Everything going forward would be affected,” he said.
Waller also disputes the loss of $9.8 million to the general fund in the remainder of fiscal 2014 through changes in the penalty assessments. “There possibly could be some additional dollars” lost but nothing in the range cited by DOR, he said.
Waller said it is important to emphasize that supporters of the tax reform bills don’t seek to limit DOR’s options for apportioning tax liabilities. The bills seek to require either party – the taxpayer or the government – to show why it is necessary to apply a standard outside the statutes, he said.