For corporations with subsidiaries in multiple states, the task of determining the amount of profits subject to a state's corporate income tax can be complicated. Traditionally, states have used a separated reporting method, which allows companies to report the profit of each of its subsidiaries independently.
Recently, some states have moved to a combined reporting method, which requires all multi-state corporations to add together the profits of all of its subsidiaries, regardless of their location, into one report. Proponents for combined reporting argue that it will close tax loopholes and increase state revenue. Opponents argue that combined reporting can attribute more corporate profits within a state than the corporation's real level of economic activity justified and will not raise the revenue proponents contend.
Currently, of the forty-four states that impose corporate income taxes, twenty-four of those states and D.C. have adopted combined reporting. Rhode Island and Connecticut switched to combined reporting in 2014 and 2015 respectively.
During the 2015 legislative session, twenty-one total bills (excluding legislative drafts) attempting either to implement a new mandatory combined reporting scheme or amend an existing unitary reporting system were introduced in Alabama, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Missouri, New Jersey, and New Mexico.
By pure volume of bills, Alabama introduced the most legislation that included combined reporting language; as several corporate nexus bills, introduced during the state’s special budget session in August, included mandatory unitary combined reporting language. That language was stripped out of that legislation prior to passage, but recent indications are that the issue will come up again when the next special budget session convenes.
In June 2015, Connecticut controversially passed combined reporting legislation (CT HB 7061 & SB 1502) in the eleventh hour of their budget debate. The legislation in Connecticut included a provision to delay the implementation of combined reporting in the state until 2016.
Other state’s whose politics heavily featured combined reporting this year include Massachusetts, which considered eliminating the state’s FAS 109 exemption as a part of their budget balancing, and Maryland, which continued its trend of introducing combined reporting legislation, but this year’s version did not leave its first committee.