by state Sen. Christine M. Tartaglione
Way back in the day, when I first introduced legislation to close the Delaware Loophole, Pennsylvania’s big-business lobby complained that adopting “combined reporting” would overwork their accountants.
Of course that was a dodge, since most of the companies affected by the bill were already doing that type of accounting because it was required in other states where they do business.
Fast-forward four years. The majority of states with corporate income taxes have adopted combined reporting and closed the loophole. Pennsylvania isn’t one of them, and four out of five corporations pay less income tax each year than the average family of four.
News of the Corbett administration’s $1 billion in corporate tax breaks, combined with the fact that most businesses don’t pay any corporate tax to begin with, have a recession-weary public increasingly irritated about an administration that is cracking down on a family’s eBay purchases while pretending not to notice the 6,000 corporations crammed into a small two-story office building in Wilmington.
The heat is enough to make the same lobbyists who complained about the complexity of combined reporting ready to embrace a way-more-complicated, burdensome and perhaps unconstitutional “fix” to the problem.
The reason businesses are warming up to this new concept, called “addbacks,” is simple: It lets them pay less tax because it doesn’t close the loophole.
It just moves it.
If it takes more paperwork to stuff the cash through smaller, more numerous loopholes, that’s OK with the accountants because at least the loopholes are still there.
The “addback” approach is enshrined in House Bill 440, which has become the subject of renewed interest as the state looks to balance a budget without offending the Fortune 500.
Essentially, the legislation tells companies they have to add income to their state tax forms if it was earned by Delaware subsidiaries that exist only to avoid Pennsylvania taxes. In order to deduct business expenses paid to Delaware subsidiaries, the subsidiary must have a “legitimate business purpose.”
It’s the corporate tax version of a pinky promise.
But I’m the author of combined reporting legislation. You shouldn’t take my word for it.
Cara Griffith, a former legal editor for State Tax Notes and manager at PricewaterhouseCoopers LLC, compared the two approaches on the website TaxAnalysts in an article aimed at corporate accountants.
After interviewing numerous tax experts she concluded that addback rules “are, in general, more burdensome from a compliance standpoint than filing a unitary return.”
But…
“Some (corporate) taxpayers prefer addback provisions to unitary combined reporting because with unitary combined reporting there is no chance for them to get any state tax benefit,” Griffith wrote.
Other experts in the article agreed that combined reporting “put an end” to the Delaware shell game, while “with addback provisions there is still the hope of a taxpayer friendly court decision or federal legislation.”
In short, combined reporting is easier and simpler, but it does not provide corporations with what their accountants like to call “tax planning opportunity.”
Tax planning opportunity is important to big businesses and when it comes to tax planning Pennsylvania is widely known as the land of opportunity.
When the Marcellus Shale extraction took off, nearly every company involved in the boom formed a bunch of Delaware subsidiaries before they ever put a drill in the ground. More than 80 percent of them – among them the most profitable companies on the planet — haven’t paid any Pennsylvania income tax.
When the British company Camelot Global Services planned to take over the state lottery, it couldn’t even wait for the deal to be approved before forming a Delaware subsidiary to run the cash through.
In an earlier article on TaxAnalysts, Charles F. Barnwell,Jr., a former “big-four” tax accountant with KPMG and now president of his own company that specializes in giving advice on state taxation, calls state-by-state addback laws “inconsistent and tricky” and “characterized by ambiguous terms” while they “appear to raise facial constitutional issues.”
“As these rules take hold,” he concluded, “controversy will mount.”
Why would the business lobby and their partners in the legislature move ahead with such an awful, complicated, and ripe-for-litigation tax scheme?
Simple: It won’t work. And tax laws that don’t work are how corporate tax accountants make the big bucks.
Again, you don’t have to take my word for it.
In 2009, a special tax-reform task force and the Pennsylvania Department of Revenue reported that adopting combined reporting would recoup more than $400 million in tax revenue that was being diverted through the Delaware Loophole.
This year, its supporters optimistically estimate House Bill 440’s addback provisions will recoup $90 million.
You don’t have to be a big-four accountant to know that $90 million is a lot less than $400 million.
And just about anybody who has ever filled out the ol’ PA-40 knows that when a corporation uses a Delaware mailbox to get a “state tax benefit,” somebody else is picking up the slack.
House Bill 440 is an attempt to buy off taxpayer anger over a state tax system that was already tilted toward large corporations before the current administration handed them the check book.
The only way to close the Delaware Loophole is through mandatory combined reporting. Anything else is just another “tax planning opportunity.”