Published: January 10, 2009 10:34 pm      

Taxation loophole coming to an end

Decision may generate millions for West Virginia

Across most of America, large, multistate firms are avoiding payment of taxes on goods marketed within a state’s borders by simply shifting them to jurisdictions where taxes are either much smaller or non-existent.

In West Virginia, that dodge is coming to an end.

And it promises to mean a multimillion-dollar bonanza in new revenue.

Thanks to a new law Senate Economic Development Chairman Brooks McCabe, D-Kanawha, steered through the Legislature, known as combined reporting, non-resident businesses earning profits in West Virginia will have to pony up and make things right with the tax man.

“It really is an attempt to level the playing field,” McCabe said.

By juggling their paperwork, some businesses merely transferred sales within West Virginia to other states to diminish their profits here and make it appear the sales occurred in states with lower taxes or none at all, McCabe explained.

“It was a way of avoiding taxes, basically corporate income taxes due and payable to West Virginia,” he said.

Kimberly Osborne, director of communications for the Department of Tax and Revenue, says the original fiscal note attached to the legislation suggested a potential $35 million annual windfall looms for the state.

“This will take a year or two to materialize, with some businesses actually realizing a net savings from the rate reductions while others will see an increase in their corporate net income tax,” Osborne said.

Under SB680, the corporate net fell from 8.75 percent to 8.5 as of New Year’s Day. That rate is structured to decrease again in 2012, 2013 and 2014, with the provision the total of the two Rainy Day Funds surpasses or equals 10 percent of the general revenue fund on June 30 in the previous year. If those rate reductions occur, the rate will stand at 6.5 percent in 2015.

Collecting more dollars wasn’t the motivator in altering the tax policy, however, Osborne emphasized.

“The purpose of requiring combined reporting was to ensure that in-state and out-of-state businesses are treated in a similar manner,” she said.

“The implementation of combined reporting will help to ensure that businesses do not shift income out of state and expenses in state in an attempt to avoid taxation in the state.”

Combined reporting actually became law Jan. 1. The first combined estimated payment is due on or after April 15, depending on the firm’s taxable year-end. The first combined annual return is due on or after March 2010.

On its Web site, The Hometown Advantage says states have moved to thwart tax evasion that occurs when chain retailers shift profits to certain subsidiaries. A common gambit is to set up a trademark holding company. Or a retailer can devise a real estate investment trust, or REIT, exempt from taxes on dividends paid to investors by virtue of a congressional act four decades ago.

Large retailers favor REIT, particularly Wal-Mart, Hometown Advantage said.

“Wal-Mart would be a good example,” McCabe agreed.

Under combined reporting, the senator explained, tax officials now can combine the various business entities that have a relationship and do business in West Virginia so the state can lay claim to its fair share of taxes on income earned within its borders.

Combined reporting initially surfaced out West and has begun its move eastward with 21 states adopting such a statute.

“It wouldn’t surprise me to see that number double within the next five years,” McCabe said.

“It makes sense. It’s a fairness issue. The way we’ve looked at it in West Virginia is that if you’re a business based in Beckley and you’re paying your fair share in taxes because you’re a West Virginia company, and say you’re competing with certain retailers who have stores in Beckley and through sophisticated tax structures, they are paying far less corporate income tax than you’re paying because of their ability to use to their advantage some of the subtleties in various multistate tax codes.”

In reality, the law was actually enacted in 2007, but leaders decided to put it on a treadmill until some kinks were worked out with industry input.

“We slowed it down two years,” McCabe reflected. “Once we passed the basic law, various industries really looked at it and just kind of went crazy. So we gave the tax department last year to rewrite certain aspects of that tax code to make it as fair and reasonable as possible.”

In the final product, McCabe said, homegrown businesses should be pleased.

“No matter what business you’re in and how you’re organized, and if you’re a multistate company or not, you have a higher level of confidence that the company down the street is going to pay the same tax on the same income that you’re going to pay. Before, that was not the case. It will bring more money in. It will take several years for it to really filter down until we know exactly the impact. But it should capture some of those lost dollars.”

— E-mail: mannix@register-herald.com