The real solution is mandatory combined reporting, which would protect North Carolina's small business and stop costly tax avoidance
RALEIGH (June 23, 2010) -- Gutting North Carolina's ability to collect from corporations that deliberately underreport their in-state earnings would hurt small businesses and drain revenue from the state, a new report released this morning says.
Senate Bill 1172, “Fair Tax Penalties,” would eliminate the state Department of Revenue's ability to levy penalties after determining that the parent company and its affiliates did not accurately report their true earnings.
“Taking away the Department of Revenue's authority to levy tax penalties would just encourage aggressive tax avoidance by large, multi-state corporations,” said Elaine Mejia, director of the NC Justice Center's Budget & Tax Center and author of the report. “This puts North Carolina's locally-owned small businesses at a major disadvantage.”
North Carolina is one of 45 states that currently levy a tax on corporate profits. In the majority of these states, affiliated corporations must file joint tax returns. But in North Carolina, affiliated corporations must file separate tax returns unless the Department of Revenue requires them to file a consolidated return. If the DOR forces a corporation and its related entities to submit a combined tax return for previous years and then determines that the companies substantially underpaid the state taxes owed, it can demand the back taxes and assess a 25 percent “large tax deficiency” penalty.
Senate Bill 1172 would revoke the state's authority to collect the 25 percent penalty in these cases.
The real solution, Mejia writes, isn't undermining tax enforcement – it's forcing affiliated corporations to account for their true earnings in the state with a policy called “combined reporting.”
North Carolina’s current corporate income tax law leaves the state vulnerable to companies that are looking to hide their true earnings in the state.
Combined reporting is a tax reporting structure where affiliated corporations must file one single tax return that combines the profits of all of the entities. From this combined return, a certain share of the combined net profits are delivered to North Carolina based on a formula that accounts for the share of payroll, property and sales in North Carolina.
“Enacting mandatory combined reporting is the only solution to ensure that all businesses are treated fairly,” said Mejia. “It would also do away with the aggressive tax avoidance strategies that have drained the state’s revenue coffers and given multi-state corporations an unfair advantage over smaller, in-state businesses.”