#1STATE of RHODE HOPE ISLAND Department of Revenue Division of Taxation House Committee on Finance Combined Reporting Study April 9, 2014 1#2STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Agenda Current Corporate Tax System ☐ Single Entity vs. Combined Filing ☐ Combined Reporting Study □ Results ☐ Administrative Challenges ☐ General Assembly Considerations 2#3STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System ☐ For Rhode Island purposes corporations must file its corporate tax return on a separate entity basis ☐ Corporations pay the higher of the corporate income tax (§44-11) or the franchise tax (§44-12) Minimum tax is $500 3#4STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System A corporation that derives all its income from sources within Rhode Island must apportion its entire net income to this state (§44-11-13). ☐ A corporation that derives income from two or more states must apportion its income to Rhode Island for corporate income tax. Generally, corporations use a three-factor apportionment formula taking into account the corporation's sales, property, and payroll (§44-11- 14). 4#5STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System Sample three-factor apportionment: Three-factor apportionment formula Rhode Island State B Total Factor Sales $2,000,000 $2,000,000 $4,000,000 $2,000,000/$4,000,000 = 50% Payroll $1,500,000 $200,000 $1,700,000 $1,500,000/$1,700,000 = 88% Property $2,500,000 $200,000 $2,700,000 $2,500,000/$2,700,000 = 93% Sum of apportionment factors = 231% Sum of apportionment factors /3 = 77% 5#6STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System ☐ Sample tax calculation using three- factor apportionment: Federal Taxable Income 1,000,000 Total Modifications Adjustable Taxable Income 1,000,000 Rhode Island Apportionment Ratio 77.00% Rhode Island Taxable Income 770,000 Tax Rate 9.0% Total Tax Due 69,300 6#7STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System □ Rhode Island General Law allows for special apportionment for specific industries: Certified Facility (§44-11-14.1): Allows a corporation to exclude from the numerator of the "payroll" factor the amount by which total qualified payroll expenses for the tax year exceeds the total qualified payroll expenses in the immediately preceding tax year. Regulated investment companies (§44-11-14.2): (also known as RICs, or mutual fund companies) Single Sales factor Credit card banks (§44-11-14.3): Apportioned to Rhode Island only to the extent that customers of the taxpayer are domiciled in RI Retirement and pension plans (§44-11-14.4): Single sales Factor International investment service (§44-11-14.5): Exclude from its net income any income derived from the sale of international investment management services. Manufacturers (§44-11-14.6): Double-weighted sales fact 7#8STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System Sample Single Sales apportionment: Single sales apportionment formula Rhode Island State B Total Factor Sales $2,000,000 $2,000,000 $4,000,000 $2,000,000/$4,000,000 = 50% Payroll $1,500,000 $200,000 $1,700,000 Property $2,500,000 $200,000 $2,700,000 Apportionment factor = 50% 8#9STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Current Corporate Tax System □ Sample tax calculation using single sales factor apportionment: Federal Taxable Income 1,000,000 Total Modifications Adjustable Taxable Income 1,000,000 Rhode Island Apportionment Ratio 50.00% Rhode Island Taxable Income 500,000 Tax Rate 9.0% Total Tax Due 45,000 6#10STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Single Entity vs. Combined Filing What is combined reporting? Generally, each corporation which is part of a unitary business must file corporate income taxes combined - reporting the entire net income of the combined group. 10#11STATE of ☐ RHODE I HOPE ISLAND Department of Revenue Division of Taxation Single Entity vs. Combined Filing "Unitary business" means the activities of a group of two (2) or more corporations under common ownership that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts. "Common ownership" means more than fifty percent (50%) of the voting control of each member of the group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether or not owner or owners are members of the combined group. 11#12STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Single Entity vs. Combined Filing States with combined reporting Alaska Kansas New York Arizona Maine North Dakota California Massachusetts Oregon Colorado Michigan Texas District of Columbia Minnesota Utah Hawaii Montana Idaho Nebraska Illinois New Hampshire Vermont West Virginia Wisconsin Note: New Mexico in 2013 approved mandatory unitary combined reporting for certain retailers. Source: U.S. Public Interest Research Group: U.S. PIRG Education Fund, January 30, 2014 12#13STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Legislation passed in the 2011 General Assembly required each corporation that is part of a unitary business under common ownership to file a pro forma report for the combined group to include the combined income of the combined group (§44-11-45). 13#14STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study ☐ The legislation required businesses to calculate their combined income using two different apportionment formulas: ■Three-factor Apportionment ■Single Sales Apportionment 14#15STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study ☐ In computing tax under the three-factor apportionment formula and under the single sales factor apportionment formula, corporations had to employ two different methods to compute the sales factor: ■ Joyce Method Finnigan Method 15#16STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Joyce Method: "Nexus" determinations are made at the level of each individual entity. Sales by an entity lacking nexus in Rhode Island are excluded from the numerator for Rhode Island tax purposes 16#17STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Finnigan Method: The entire unitary group as a whole is treated as the taxpayer for apportionment purposes. All sales of members of the unitary group attributable to Rhode Island are included in the sales factor numerator. 17#18STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Joyce vs. Finnigan Example: Name of Rhode Island Everywhere Nexus with entity receipts receipts Rhode Island Hotel Corp. 50 100 Yes India Corp. 100 200 Yes Juliet Corp. 100 200 No 18#19STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Joyce vs. Finnigan Example: Name of Rhode Island Everywhere Nexus with entity receipts receipts Rhode Island Hotel Corp. 50 100 Yes India Corp. 100 200 Yes Juliet Corp. 200 No Joyce Method: 150 / 500 = 30.0% 19#20STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Joyce vs. Finnigan Example: Name of Rhode Island Everywhere Nexus with entity receipts receipts Rhode Island Hotel Corp. 50 100 Yes India Corp. 100) 200 Yes Juliet Corp. 100 200 No Finnigan Method: 250 / 500 = 50.0% 20 20#21STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study Joyce vs. Finnigan Example: Name of Rhode Island Everywhere Nexus with entity receipts receipts Rhode Island Hotel Corp. 50 100 Yes India Corp. 100 200 Yes Juliet Corp. 100 200 No Joyce Method: 150 / 500 = 30.0% Finnigan Method: 250 / 500 = 50.0% 21#22STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Combined Reporting Study ☐ Process: ■ Promulgated regulation on December 31, 2011. ■■Performed several outreach/training seminars for businesses and practitioners. Created new schedule to be filed with corporate income tax return (CRS form) 22#23STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation RI-1120C Name pago 4 Schedule CRS - Required Data for Combined Reporting Study Section 1 - Combined Group Information Federal employer identification number Yes No 2000 00 A. Is this company a member of a combined group of companies? B. Is another company the designated agent responsible for the combined group? C. D. Is an election being made to file based on the federal consolidated return? E. Is a FAS 109 Deduction Statement attached? If yes, provide the federal employer identification number of the designated agent filing the combined report. A F If yes, provide the lump sum FAS 109 deduction amount. Section 2 - Combined Group Calculations 1 Combined Federal Taxable Income 2. Combined Deductions (Attach detailed schedule). 3. Combined Additions (Attach detailed schedule) 4. Adjusted Taxable Income. Line 1 minus Line plus Line 3 Rhode Island Everywhere Ratio 5. Combined Average Net Book Value of Property 6. Combined Receipts using Joyce Method. 7. Combined Receipts using Finnigan Method. 8. Combined Salaries, Wages and Compensation. 9. Combined Ratios Total Joyce Method - Add Ratios from lines 5, 6 and 8 Finnigan Method - Add Ratios from lines 5, 7 and 8 10. Combined Apportionment Ratio - For each method, divide line 9 by 3.0. 11. Rhode Island Adjusted Taxable Income - For each method, multiply line 4 times line 10.. 12. Combined Rhode Island Tax (If zero or less, enter zero.) 13. Credits under Combined Reporting (Attach detailed schedule) 14. Tax Due under Combined Reporting Line 12 minus Line 13 (If zero or less, enter zero.) 15. Tax Due using Single Sales Factor (If zero or less, enter zero.) 16. Tax Due on actual filing (Including Rhode Island Minimum Tax for all members of the combined group) 17. Minimum Tax for the combined group (see instructions). 18. Combined Sales. 19. Taxable Income. Joyce Method Finnigan Method Rhode Island Worldwide Section 3 - Listing of Companies included in this Combined Report (If more space is needed, attach a separate sheet.) Federal ID# Name 2012 RI Filing Requirement (Y/N) Federal ID# Name 2012 RI Filing Requirement (Y/N) Total number of companies included in this Combined Report: 23#24STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results Results are based solely on the returns as filed. ☐ Returns were not audited by Division of Taxation. ☐ Generally tax years 2011 and 2012 were positive years for businesses. 24#25STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results Total filers required to file a combined report: Total Combined Tax Year Reports Filed 2011 1,370 2012 1,621 25#26STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results ☐ Legislation required Division of Taxation to report on the financial impacts of combined reporting using three-factor apportionment. Division analyzed both the Joyce and Finnigan methods of apportionment. 26#27STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results ☐ Joyce Method - three-factor apportionment: Increase in Tax Decrease in Tax No Change Total Tax Year Count Amount Count Amount Count Count Net Change 2011 401 $31,033,225 137 ($7,606,284) 832 1,370 $23,426,941 2012 343 $27,321,476 125 ($5,811,556) 1153 1,621 $21,509,920 27#28STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results ☐ Finnigan Method - three-factor apportionment: Increase in Tax Decrease in Tax No Change Total Tax Year Count Amount Count Amount Count Count Net Change 2011 420 $32,828,692 130 ($7,543,493) 820 1,370 $25,285,199 2012 359 $28,916,825 122 ($5,784,150) 1140 1,621 $23,132,675 28#29STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results ☐ Legislation also required Division of Taxation to report on the financial impacts of combined reporting using single sales factor apportionment. Division analyzed both the Joyce and Finnigan methods of apportionment. 29 29#30STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results Important Note: The following results include only the corporations required to file on a combined returns. The results do not reflect the overall effect on all corporations of a change to single sales factor apportionment. 30#31STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results ☐ Joyce Method - single sales factor apportionment: Increase in Tax Decrease in Tax No Change Total Tax Year Count Amount Count Amount Count Count Net Change 2011 477 $60,630,244 70 ($11,168,989) 823 1,370 $49,461,255 2012 434 $44,742,831 63 ($6,113,103) 1124 1,621 $38,629,728 31#32STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results Finnigan Method - single sales factor apportionment: Increase in Tax Decrease in Tax No Change Total Tax Year Count Amount Count Amount Count Count Net Change 2011 501 $65,814,591 69 ($11,154,547) 800 1,370 $54,660,044 2012 455 $50,299,771 59 ($5,908,062) 1107 1,621 $44,391,709 32#33STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Results ☐ Single Sales factor apportionment tax year 2012: Net Change Category Filers required to file Combined Group Count Joyce Finnigan 1,621 Member of Combined Group w/ RI Filing Requirement 6,393 38,629,728 44,391,709 Member of Combined Group no RI Filing Requirement 935 Filers with 100% Apportionment 4,096 0 0 Filers not required to file Combined Group 6,668 (4,407,954) (4,407,954) 19,713 34,221,774 39,983,755 33#34STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Administrative Challenges □ Combined reporting is complex ☐ Lack of expertise in the State ☐ Increased legal challenges 34 ==#35STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation General Assembly Considerations □ Combined vs. single entity reporting ☐ Effective date of any change Worldwide income vs. Water's Edge Tax Havens 35 55#36STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation General Assembly Considerations ☐ Apportionment formula Three-factor vs. Single Sales Joyce vs. Finnigan Market-based Sourcing ☐ How would various benefits impact combined group? 36#37STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation General Assembly Considerations ☐ Overall Corporate Tax Rate ☐ Impact of FAS 109 Franchise Tax/Minimum Tax? ☐ Others? 37#38STATE of RHODE I HOPE ISLAND Department of Revenue Division of Taxation Questions? 38 88