Testimony before the Maryland Business Tax Commission
reportConsequently, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance. It ensures that form – specifically, the form in which corporations choose to organize themselves, which may be manipulated to reduce their tax liabilities – does not triumph over substance – namely, the true level of economic activity in which a corporation may be engaged in particular state. Moreover, it is wholly consistent with and, indeed, a necessary complement to, formulary apportionment. States do not simply leave it up to businesses to decide the extent to which in-state operations contribute to their overall profitability – and by extension, to decide the amount of income subject to taxation in a given state. Rather, through their apportionment formulas, states require corporations to use objective factors, such as payroll, property, or sales, to make those determinations. States that continue to use separate entity reporting, in effect, cede such decisions back to corporations doing business within their boundaries, allowing them to define what their operations are for tax purposes. Combined reporting, on the other hand, restores the role that objective factors, such as those embodied in states’ apportionment formulas, play in determining corporate tax liabilities. Richard Pomp of the University of Connecticut summarized this situation quite well, when he noted over a decade ago that, “A state that does not require related corporations conducting a unitary business to file a combined report is at the mercy of its corporate taxpayers.