On behalf of our 20,000 member companies the New Jersey Business & Industry Association (NJBIA) respectfully opposes S-982, sponsored by Senators Lesniak, Sarlo and Greenstein, which requires members of unitary business groups to file combined reports of Corporation Business Tax (CBT).
Our three main concerns with the bill are: 1) increased complexity & uncertainty; 2) difficulty in predicting state revenues; and 3) New Jersey’s numerous safeguards to ensure companies are paying accurate amounts of CBT.
Increased Complexity and Uncertainty
Combined reporting can introduce significant complexity and uncertainty for taxpayers. As such, this system will create “winners” and “losers,” that may experience an increase, decrease or leave unchanged the taxable income reported on a combined return, compared to the sum of the taxable incomes for the separate taxpayers.
In particular, legitimate differences are likely to arise between taxpayers and auditors concerning the scope of the “unitary group.” Determining the scope of the unitary group is a complicated process, which often results in expensive, time-consuming litigation for both companies and states.
Additionally, transitioning to combined reporting requires a significant investment by the state taxation department. In addition to developing new forms and instructions, a state taxation department will face significant challenges in training auditors to handle the complexity of combined reports.
The additional compliance, administrative and litigation costs associated with combined reporting should be included in a balanced evaluation of the benefits and costs of adopting combined reporting. Even if more dollars are generated, they may well be more than offset by the additional time, energy and expenses associated with compliance, audits, appeals and litigation.
Difficulty Predicting State Revenue
Combined reporting has uncertain effects on a state’s revenues, making it very difficult to predict the revenue effect of adopting combined reporting. A review of past state revenue estimates of combined reporting reveals a wide range of expected impacts reflecting the high degree of uncertainty in the estimation process. States that looked at current tax return information as a starting point in the estimating process found lower impacts.
After reviewing the initial estimates after implementation, Minnesota concluded that combined reporting did not increase revenues at all in the short- or intermediate-run. Furthermore, Maryland collected data for five years from corporate taxpayers to determine the impact of adopting combined reporting. As a result of this study, Maryland found that had it adopted combined reporting, it would have either gained or lost revenue depending on the economic conditions. As a result, Maryland chose to not enact combined reporting.
Additionally, the National Conference of State Legislatures commissioned a report on combined reporting that was issued in 2010. The report studied the effectiveness of combined versus separate reporting with respect to: the capacity to provide a consistent measure of business profits; taxpayer compliance and state administration; effect on the economy; and the impact on income tax revenues. Importantly, the report found no evidence that combined reporting enhances tax revenues.
Reliably estimating the state revenue impact of adopting combined reporting is a very challenging task. Considerable uncertainty surrounds combined reporting estimates due to: the lack of needed information on separate filing returns, inability to identify members of the unitary group, absence of information on carryover net operating losses and unused credits into the new system, insufficient data to estimate changes in apportionment formulas, and the interaction of combined reporting with addback statutes and other measures previously enacted to address income shifting in many separate filing states.
New Jersey’s Numerous Safeguards Already in Place
New Jersey has a number of safeguards and tools in place to ensure that companies pay the accurate amount of Corporation Business Taxes (CBT) on their New Jersey taxable income. For example, the New Jersey Director of the Division of Taxation may currently require a taxpayer to file a consolidated tax return with related members, if the Director determines that a taxpayer’s CBT return report does not reflect its true earnings in New Jersey.
Also, under the current statute, a taxpayer is not permitted to deduct interest and royalty expenses paid to affiliates unless a specific exemption applies. The current statutory provisions, therefore, already safeguard against taxpayers “exporting” taxable income beyond New Jersey’s reach. States that have already enacted these so-called “addback” provisions, like New Jersey, can expect significantly reduced additional revenue from combined reporting as these add back provisions achieve much of the same revenue effect as combined reporting.
Once again, NJBIA respectfully opposes S-982, and should you have any questions or need any further information, please contact me at (609) 858-9512.
TO: Members of the Senate Budget and Appropriations Committee
FR: Andrew Musick, Director, Taxation & Economic Development
DATE: June 6, 2016