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The 2012 state legislative season is shaping up to be another banner year for combined reporting proposals in the various statehouses around the nation. At least eight state legislatures are considering such proposals,1 but the prospects for enactment vary widely. The following is a brief overview of some of the more interesting aspects of these proposals.
Alabama H.B. 1999 would require a "unitary business" to file a combined return. The proposal defines a "unitary business" as "a single economic enterprise that is made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts." There is nothing unique in this definition as it is identical to the definition from the Multistate Tax Commission model statute, but it also goes on to include those members of the unitary business "commercially domiciled in a non-U.S. jurisdiction designated as a tax haven" by the OECD. The interesting and unaddressed question in the proposal is how it would interact with Alabama's longstanding election to file an Alabama consolidated return to affiliated groups in Alabama which file a consolidated federal return.
Florida S.B. 1590 would change the definition of "taxpayer" to include "all corporations that are members of a water's edge group" and defines "water's edge group" as a "group of corporations related through common ownership whose business activities are integrated with, dependent upon, or contribute to a flow of value among members of the group." The proposal spells out rules for determining the members of the water's edge group and provides detailed requirements for using the water's edge reporting method to determine the group's taxable business profits. Another interesting aspect is the requirement of the group to file a domestic disclosure spreadsheet. The contents of which are not exactly clear.
Kentucky H.B. would repeal the nexus consolidation filing requirements enacted in 2005 and return Kentucky to its pre-2005 filing requirements. The likelihood of its enactment is suspect given the establishment of a special committee by Governor Beshear to look at tax reform options for Kentucky.
The relative chances of success for these, and the other, proposals are suspect, but with the ongoing fiscal struggles that the states are facing and the commonly shared view that these proposals are revenue generators, tax practitioners must keep a close eye on these types of legislative proposals.
1. These states are Alabama (H.B. 199), Florida (S.B. 1590); Kentucky (H.B. 162); Maryland (H.B. 941); Missouri (H.B. 1727); New Mexico (S.B. 9); Oklahoma (S.B. 1562); and Virginia (H.B. 1267).
RELATED LINKS: For further insight into state tax combined reporting principles and issues, see:
1-3 Bender's State Taxation: Principles and Practice § 3.05 - State Income Tax Formula
1-3 Bender's State Taxation: Principles and Practice § 3.12 - Apportionment and Combined/Consolidated Returns
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