State Corporate Tax Reform - Combined Reporting

One of the proposals some states are pursuing to raise revenue and close perceived loopholes is to require combined reporting for businesses. California has used combined reporting for years.

In his 1/15/08 state-of-the-state address, Iowa Governor Culver proposed combined reporting for corporations. He observes that it would "level the playing field for Iowa small businesses" and "close a tax loophole [that allows] multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes."

With combined reporting, corporate entities do not report their separate business activities to determine how much is apportionable to a particular state. Instead, they combine the results of all entites that are part of a "unitary group" such as subsidiaries. Combined apportionment factors are then applied to the unitary group to determine how much income is taxable in the state. The perceived benefit is that companies cannot use related entities to shift profits to low tax states. However, some believe it is not a fair way to calculate tax as it is more likely to attribute income to a jurisdiction to which it has no direct connection.

Combined reporting was proposed in Massachusetts in 2003 and in New York in 2007 (or perhaps even earlier).

The Center for Budget & Policy Priorities has a report on combined reporting and where it is used among states.

Is Governor Culver moving Iowa's tax system into the 21st century? Arguably yes. Combined reporting is more likely to better reflect the reality of how businesses operate today and the reality that separate entities exist for tax and non-tax reasons. His proposal is likely to lead the legislators and others to consider how best to move the state tax system into the 21st century's ways of doing business.