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COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES
FINANCE COMMITTEE PUBLIC HEARING
STATE CAPITOL HARRISBURG, PA
MAIN CAPITOL BUILDING ROOM 14 0
WEDNESDAY, APRIL 15, 2 015 9:00 A.M.
PRESENTATION ON COMBINED REPORTING
BEFORE:HONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLEHONORABLE
BERNIE O ’NEILL, MAJORITY CHAIRMANSTEPHEN BLOOMGEORGE DUNBARMATTHEW GABLERSETH M. GROVELEE JAMESAARON KAUFERJOHN A. LAWRENCEDUANE MILNEMIKE PEIFERTHOMAS QUIGLEYBRAD ROAETHOMAS SANKEYJAKE WHEATLEY, DEMOCRATIC CHAIRWOMANLESLIE ACOSTAMARY JO DALEYMARGO L. DAVIDSONMADELEINE DEANSID M. KAVULICHSTEPHEN KINSEYDANIEL T. MCNEILL
Pennsylvania House of Representatives Commonwealth of Pennsylvania
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COMMITTEE STAFF PRESENT:TAMARA FOX
MAJORITY EXECUTIVE DIRECTOR
MARK FOREMANDEMOCRATIC EXECUTIVE DIRECTOR
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I N D E X
TESTIFIERS ~k k k
NAME PAGE
FERDINAND S. HOGROIAN, ESQ.SENIOR TAX AND LEGISLATIVE COUNSEL,TESTIFYING ON BEHALF OFCOUNCIL ON STATE TAXATION........................... 8
RAYMOND CHOPPER, CPATESTIFYING ON BEHALF OFPICPA COMMITTEE ON STATE TAXATION..................52
MATTHEW MELINSON, CPAGRANT THORNTON, LLP TESTIFYING ON BEHALF OFPICPA COMMITTEE ON STATE TAXATION..................57
TOM BOWEN, ESQ., CPASHAREHOLDER OF STEVENS & LEE,CHAIR OF PA CHAMBER TAX EXECUTIVE COMMITTEE,TESTIFYING ON BEHALF OFPA CHAMBER AND PICPA PANEL......................... 65
SUBMITTED WRITTEN TESTIMONY ~k ~k ~k
(See submitted written testimony and handouts online.)
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P R O C E E D I N G S ~k ~k ~k
MAJORITY CHAIRMAN O ’NEILL: Good morning,
everyone. I’d like to bring the meeting of the House
Finance Committee to order. This is a public hearing.
Before we begin, I just want to inform everybody
that I believe we are being telecast live but it’s also
being filmed by the Chief Clerk’s Office, and so I’d also
ask you to respectfully turn off your cell phones or
silence all electronic devices.
Before we begin, what we’ll do is we’ll have the
Members introduce themselves. We’ll start with the
Chairman.
DEMOCRATIC CHAIRMAN WHEATLEY: Thank you,
Mr. Chairman.
Representative Jake Wheatley from Allegheny
County, Legislative 19th District, City of Pittsburgh.
MR. FOREMAN: Mark Foreman, Democratic Executive
Director.
REPRESENTATIVE KINSEY: Good morning,
Mr. Chairman. Representative Steve Kinsey from
Philadelphia County.
REPRESENTATIVE KAVULICH: Good morning, everyone.
Representative Sid Kavulich, 114th District, Lackawanna
County.
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REPRESENTATIVE BLOOM: Representative Stephen
Bloom, 199th District, which is Cumberland County.
REPRESENTATIVE ROAE: Representative Brad Roae,
Crawford County and Erie County.
REPRESENTATIVE SANKEY: Tommy Sankey, 73rd
District, Clearfield, Cambria.
REPRESENTATIVE DUNBAR: Representative George
Dunbar, Westmoreland County.
REPRESENTATIVE MILNE: Good morning. Duane
Milne, Chester County, Malvern area.
REPRESENTATIVE PEIFER: Good morning. Mike
Peifer, 139th District, Pike and Wayne Counties.
REPRESENTATIVE DAVIDSON: Margo Davidson,
Delaware County.
REPRESENTATIVE QUIGLEY: Tom Quigley, Montgomery
County.
REPRESENTATIVE GROVE: Seth Grove, York County.
MS. FOX: Tammy Fox, Executive Director to the
Committee.
MAJORITY CHAIRMAN O ’NEILL: And I’m
Representative Bernie O ’Neill, the Chairman, and I
represent the 29th District, which is the center of Bucks
County.
Before we begin, I just want to give a little
history. Today’s hearing is on combined reporting. I came
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up with this idea because it’s the old teacher in me.
Those of you who don’t know, I used to be a schoolteacher
at one time. I was actually a behavior specialist. That’s
why I can deal with her so well. Only kidding.
Anyway, there’s a lot going on with combined
reporting through the Governor’s office and other avenues
so it’s a very convoluted, difficult tax policy to
understand, so I thought it would be good to have an
educational hearing to educate the Members of the
Committee, as well as any other Members and the public that
would like to hear and learn about combined reporting. So
therefore, we put this hearing together.
We’ve made it very clear to the testifiers that
they’re only to speak to the educational part of what
combined reporting is. We respectfully ask them not to
deviate to anybody’s proposals, whether in favor of it or
against it or whatever, and we made that very clear. There
were some people and organizations that were invited to
testify but chose not to because they felt that they could
not honor that agreement in sticking just to the
educational part, and we respect that. So we thank them
for being forthright with us.
I spoke to my Members of my Caucus and made it
real clear that all questions and comments will be directed
towards the task at hand today and not any policy or
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politics of any kind. And I will be asking all Members of
the Committee to do the same.
So with that, we'll get on with the hearing, but
before we begin, I'll open up the comments to Chairman
Wheatley.
DEMOCRATIC CHAIRMAN WHEATLEY: Thank you,
Mr. Chairman.
And again, I definitely want to say thank you,
Mr. Chairman, for having this educational meeting today. I
would like to just go on the record and say, as a former
student, it was always good for me to have access to both
sides of an issue, and we all know that no one comes
totally without their own biases and independent thoughts
on subject matters.
And so we would just encourage, as we move
forward in this season and knowing that we will have
numerous other very complex subject matters, that we try as
best we can to have both sides of an issue at a table
informing the Members so that we can clearly see the full
picture and breadth of the scope of whatever we're dealing
with. And this is such a complex situation.
From a Democratic perspective, we would have
liked to have had at least given the Governor and the
Administration a chance to lay out why they thought this
issue was important for us as a Commonwealth, and hopefully
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moving forward we will be giving the Administration some
opportunities to discuss with us their rationale for not
only offering combined reporting but other avenues of tax
package changes or requests.
So with that, I'm definitely looking forward to
this information, and hopefully we will have a very engaged
conversation. Thank you, Mr. Chairman.
MAJORITY CHAIRMAN O ’NEILL: Thank you. And
hopefully maybe down the future we will be having those
types of conversations and hearings. So thank you for your
comments.
We’re going to begin today with our first
testifier, and that’s the Council on State Taxation, and
Ferdinand -- and I apologize if I do not pronounce your
last name right -- Hogroian.
MR. HOGROIAN: That’s very good.
MAJORITY CHAIRMAN O ’NEILL: Did I get it right?
MR. HOGROIAN: Hogroian.
MAJORITY CHAIRMAN O ’NEILL: Hogroian.
MR. HOGROIAN: Yes, sir.
MAJORITY CHAIRMAN O ’NEILL: Okay. Thank you.
Before we begin, we’ve also been joined by
Representative Gabler.
The mike’s yours.
MR. HOGROIAN: Thank you, Chairman O ’Neill,
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Chairman Wheatley, and Members of the Committee. Thank you
again for the opportunity to provide testimony today on
behalf of the Council on State Taxation regarding the
concept of combined reporting for corporate income tax
purposes.
As Chairman O ’Neill referenced, these comments
are going to be with respect to combined reporting as a
corporate income tax filing method and not specifically
with respect to any particular proposal.
Combined reporting, which originated in
California, is more commonly associated with western U.S.
States, but more recently has been adopted in certain
eastern States as well. This method is quite different
from the State separate filing method or the Federal
consolidated method familiar to Pennsylvania corporate tax
practitioners. In the brief time available today, I will
seek to provide the Committee with an overview of the
combined reporting method and COST’s and other research on
its effects.
For State corporate income tax purposes,
"separate entity reporting” treats each corporation as a
separate taxpayer. This is the Pennsylvania method. Under
this method, taxable income is often computed without
regard to the Federal consolidated rules, and taxpayers
prepare pro forma State returns with tax computed on a
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separate company basis. Again, this is the method
Pennsylvania currently uses; it is also used by many other
Eastern States. Of Pennsylvania's neighboring States,
Delaware, Maryland, and New Jersey employ the separate
entity reporting method.
However, after two decades without any change to
the general East/West dichotomy of separate versus combined
reporting adoption, Vermont in 2004 enacted a combined
reporting law. Since that time, a small number of States,
mainly in the Northeast, have followed suit. The
southernmost reach of combined reporting in the East
includes two of Pennsylvania's neighbors: West Virginia,
which adopted combined reporting in 2007; and New York,
which last year adopted unitary combined reporting after
many years of using a distortion-based test to address
certain transactions between affiliates.
Combined reporting generally treats affiliated
corporations -- parents and subsidiaries -- engaged in a
unitary business as a single group for purposes of
determining taxable income. I say "generally" because
there are significant variations among combined reporting
States in how entities within the combined group are
treated vis-a-vis other group members. These variations
include application of nexus rules, members of the unitary
group, apportionment, loss deductions, credits, and other
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items.
The combined reporting method is significantly
different from the Federal consolidated method, in part
because of the ways in which the combined method has
developed independently at the State level, and more
fundamentally because of the Constitutional limitations on
State taxation of a multistate business. The purpose of a
combined report is to geographically source the income of
the unitary business, regardless of the nexus or presence
of its members, whereas the Federal consolidated method is
applied on a residence basis. In addition to the unitary
requirement, a Constitutional requirement that does not
apply at the Federal level, combined reporting is also
generally subject to different ownership requirements
Combined reporting comes in two general flavors,
a pre-apportionment combination and post-apportionment
combination. In the pre-apportionment calculation, the
separate companies’ income is combined across the unitary
group, and then is apportioned with a combined factor,
yielding base income against which the statutory tax rate
is applied. In the post-apportionment calculation, the
separate companies determine their own base income down the
list of combined group members, and then apply their own
apportionment factor to yield base income against which the
statutory tax rate is applied.
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This general description lays the groundwork for
the calculation, but does not begin to describe the
complexities in determining tax attributes and
apportionment for unitary groups and their members. Nor
does it describe all the kinds of combination and
consolidation options and requirements in effect across the
country.
The members of a consolidated group are generally
limited to the water’s edge, that is, the U.S. incorporated
businesses within the unitary group with certain exceptions
for foreign income streams. Every State, with the limited
exception in effect in Alaska, limits filing to the water’s
edge, or provides a water’s-edge election.
Having run through the basic concept of unitary
combined reporting, let me share with you some of the
research on the issue. I have appended to my written
testimony COST’s 2008 study on the competitiveness and
revenue effects of combined reporting, although I’ll cite
other more recent studies as well.
So, first, the effect of combined reporting on
jobs, evidence indicates that adopting combined reporting
hinders investment and job creation in adopting States.
Where combined reporting results in a relatively small
increase in net corporate tax revenue, there will be
significant increases and decreases in tax liabilities for
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individual businesses, as well as increases in
administration and litigation costs. Depending on the
industry distribution of winners and losers, combined
reporting may have a negative impact on a State’s overall
economy. Moreover, economic theory suggests any tax
increase resulting from adopting combined reporting will
ultimately be borne by labor in the State through fewer
jobs or lower wages over time or instate consumers through
higher prices for goods and services.
The COST study shows that States using separate
entity reporting experienced higher job growth than States
with combined reporting. From 1982 through 2006, job
growth was 6 percent higher in States without combined
reporting than States with it after adjusting for
population changes. Further, research shows that during
the recent recession, States with combined reporting
experienced economic declines 16 percent greater than
States without combined reporting.
Now, a brief discussion of the effect on revenue:
Implementing combined reporting can have unpredictable and
uncertain effects on State tax revenues. Some of the key
uncertainties in implementing combined reporting are the
impact of including loss companies in the group and the
impact of apportionment dilution from out-of-state
affiliates. The corporate income tax is the most volatile
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tax in every State in which it is levied, regardless of
whether combined reporting is employed.
In one study, the University of Tennessee found
no evidence that States with combined reporting collect
more revenue, and later found that combined reporting may
or may not increase revenue. In Maryland, a statutory
commission found similar volatility, with combined
reporting increasing revenue in some years and reducing it
in others.
While the number of corporations filing zero
returns is often cited as a reason for adopting combined
reporting, the COST study reflects that a high percentage
of companies in both separate entity reporting and combined
reporting States filed minimum or zero returns. This was
generally due to the application of loss carryforwards, a
large number of inactive corporations or corporations
required to register for regulatory purposes, or the
intended effect of exclusions, deductions, and credits.
Another important revenue consideration is that
States that have already enacted provisions limiting
deductions for related party expenses like Pennsylvania's
existing "add-back" statute can expect significantly
reduced anticipated incremental revenue from combined
reporting. In addition to mitigating any revenue gains
from combined reporting, application of add-back may create
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instances of double taxation, for example. Pennsylvania’s
statute already disallows intercompany deductions for
payments of certain intangible expenses.
And now a brief discussion of administrative
considerations: Combined reporting is more complex than
separate filing, in particular because of the extensive
fact-finding required to determine the composition of the
unitary group and to calculate combined income. This
complexity results in uncertainty and significant
compliance costs for both taxpayers and the State. Here
are some examples:
First, determining the unitary group members.
The unitary business is a Constitutional concept that
allows a group of legal entities with common ownership and
other specific facts to be treated as a whole unitary
business enterprise for income tax purposes rather than as
individual separate legal entities. Auditors must annually
determine how a taxpayer and its affiliates operate and
interact at a fairly detailed level to determine which
affiliates are unitary, if any. There is an incentive for
the tax result of a unitary relationship to influence the
auditor’s finding, as well as the taxpayer’s determination.
In short, determining the scope of the unitary group is a
complicated and subjective process not required in separate
filing States
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Next, calculating combined income: Calculating
combined income is considerably more complicated than
simply basing the calculations on consolidated Federal
taxable income. In most combined reporting States, the
group of corporations included in a Federal consolidated
return differs from the members of the unitary group. In
some instances, a taxpayer that files a single Federal
consolidated return may have more than one unitary group
and therefore may be required to file multiple State
unitary returns. Special rules apply to calculation of
apportionment factors beyond those already present in
separate return filing States. From a financial reporting
perspective, adopting combined reporting is a significant
change that requires States to consider ways to mitigate
the immediate and negative impact those tax changes have on
a company’s financial statements.
Next, implementation concerns: Both taxpayers
and revenue departments have struggled with implementing
combined reporting. For example, Texas’ margin tax, which
is implemented on a combined basis, resulted in years of
computer system errors and required significant retraining
of the Comptroller’s Office compliance and audit staff.
The transition has not been smooth in Massachusetts either,
resulting in multi-year changes to the State’s e-filing
requirements for combined groups and the need for multiple
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rounds of surveys of groups such as COST to determine how
to improve the State’s filing system.
The resulting frustration for taxpayers is
substantial, with, for example, 64 percent of COST member
survey respondents rating Massachusetts combined filing
compliance as a "nightmare," and 28 percent calling it
unnecessarily difficult. Only 8 percent of our members
responding thought it was average difficulty. This
reflects the steep learning curve for both taxpayers and
revenue agencies, which translates to substantial
investments in compliance and administration.
And finally, concerns with fairness: Although
combined reporting may be designed to help overcome
distortions in the reporting of income among related
companies in separate filing systems, the mechanics used
under combined reporting create a new set of distortions in
assigning income to different States. The combined
reporting assumption that all corporations in an affiliated
unitary group have the same level of profitability is not
consistent with either economic theory or business
experience. Consequently, combined reporting may reduce
the link between income tax liabilities and where income is
actually earned.
Concerns with the fairness of combined reporting
adoption are deepened by restrictions on the use of unitary
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affiliates' tax credits and losses to offset the group's
combined income. A cap on net operating loss deduction
utilization such as that employed in Pennsylvania further
exacerbates the unequal treatment of combined reporting
adoption. Combined reporting may also result in unintended
disqualification of taxpayers from economic development
incentive eligibility. For example, the Keystone
Opportunity Zone qualification could be negatively impacted
by inclusion of combined factors.
Another important consideration is whether
combined reporting regimes seek to reach beyond what is
commonly recognized as the water's-edge, as previously
described, in a manner that could lead to double taxation
of global companies operating in an adopting State. For
example, a small number of States have adopted "tax haven"
classification, which include all income from companies
incorporated in certain nations, regardless of the
substance of particular transactions or corporate
structures. Adoption of such provisions increases concerns
over the arbitrary impact of combined reporting, as well as
exacerbating revenue and competiveness concerns as global
companies examine locations in which to invest and create
jobs.
In conclusion, although it has been considered
and adopted in certain Eastern States in recent years,
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studies show combined reporting is a costly means by which
a State may seek to raise relatively small amounts of
revenue, because of its negative impact on job creation,
the burdens of compliance and administration, and the
uncertainty it generates.
Thank you for your invitation to testify here
today and I look forward to any questions from the
Committee.
MAJORITY CHAIRMAN O ’NEILL: Thank you. We’ll
begin with questions with Chairman Wheatley.
DEMOCRATIC CHAIRMAN WHEATLEY: Thank you,
Mr. Chairman.
And again, good morning and thank you for being
here. I really enjoyed listening to your presentation.
While I was listening, I heard the cons against combined
reporting. Now, give me some pros. Why have 28 States
already gone to combined reporting? What are the good
things about it?
MR. HOGROIAN: Well, thank you, Mr. Chairman.
The combined reporting methodology looks at the
entire business enterprise, so to the extent that there is
contribution to the generation of income within a State,
the combined report includes those entities that are not
taxable in the State, as well as those that are taxable
within the State and combines the incomes of those entities
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to create a larger picture of the enterprise. It’s based
on the unitary reporting method, so that’s a Constitution
concept of where those companies have significant
interrelation to deem that out-of-state business to be
connected in a real way with the instate business. So that
is the essential theory behind combined reporting.
DEMOCRATIC CHAIRMAN WHEATLEY: So are there any
good qualities to doing it that way? I mean let’s take
your fairness perspective. Could a State that goes to a
combined reporting mechanism create a fair environment for
businesses to compete?
MR. HOGROIAN: The overall structure allows for
the profitability of out-of-state operations to affect the
tax result within the State. So there is an inherent
structure of combined reporting results in some
distortions. So the distortions that I described in my
testimony cannot be extracted from the combined reporting
methodology. So there’s the beneficial theory in that
you’re capturing the entire unitary enterprise and
subjecting it to taxation, but then there are the
distortions that result through that method. And then
there’s the complexity in terms of determining the unitary
income and the uncertainty with respect to determining
which entities are included, because ultimately on audit,
in addition to the computation, the controversy is going to
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be over whether that profitable entity is unitary or not
and whether that -
DEMOCRATIC CHAIRMAN WHEATLEY: Are you a lawyer
or an accountant -
MR. HOGROIAN: I'm a lawyer, sir.
DEMOCRATIC CHAIRMAN WHEATLEY: You’re a lawyer.
Because I couldn’t tell if that was a pro or a con what you
just said but I’ll move on.
Are you aware that in Pennsylvania that our local
business chambers have often cited that 71 percent of
corporations in Pennsylvania pay no corporate income tax at
all and that most Pennsylvania businesses are small
businesses that pay the PIT? Are you aware of this fact?
MR. HOGROIAN: Yes, sir. In our study, the one I
cited, combined reporting in separate entity States, there
are relatively similar numbers of zero returns because of
various reasons, including loss carryforward deductions.
DEMOCRATIC CHAIRMAN WHEATLEY: Are you also aware
that in 2006, which was the last available year of this
particular fact, 71 percent of the subchapter C
corporations, which are the traditional corporations that
pay this corporate net income tax here in this
Commonwealth, they did not pay income taxes. And in the
same year, 14 percent of those corporations paid less than
$1,000 in corporate net income tax. Are you aware of this?
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MR. HOGROIAN: Not those exact numbers but I
think it reflects the -
DEMOCRATIC CHAIRMAN WHEATLEY: I’m leading you
somewhere so -
MR. HOGROIAN: Certainly.
DEMOCRATIC CHAIRMAN WHEATLEY: -- if you’ll bear
with me.
MR. HOGROIAN: Yes.
DEMOCRATIC CHAIRMAN WHEATLEY: And the reason I’m
saying this is because in this same year, according to our
Department of Revenue, during a booming economy before we
had the recession, a family that was earning $36,000 paid
more in State taxes than 84 percent of Pennsylvania
corporations. Now, I gave you the fact that most of our
corporations are small corporations that will not
necessarily, unless they have subsidiaries in other States,
be impacted by combined reporting. Most of our companies
aren’t that. They’re homegrown Pennsylvania companies that
are doing business only in the State of Pennsylvania.
Combined reporting, as I understand it, and maybe
I have it wrong -- listening to you, I must be in
California and not in Pennsylvania -- combined reporting
would only try to level the playing field of corporations
that are doing business outside of Pennsylvania in a way to
try to ascertain what their fair income or tax liabilities
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are to our Commonwealth.
While they’re competing with our smaller
corporations who are competing with these multistate
corporations, we have no break for them to get away from
their responsibility and obligations, but in this current
environment, multistate corporations can move revenues
around or income around so that they have a more
competitive advantage. This is my understanding. So do I
have that at least right?
MR. HOGROIAN: Well, Mr. Chairman, I think I
think you hit on it in terms of moving profits outside the
State, and it goes to whether there’s not an accurate
reflection of income subject to Pennsylvania tax currently
under the separate return system. And Pennsylvania has an
add-back law in effect where there are payments outside the
State that are added back to Pennsylvania corporate
members’ income.
So there are measures in effect now and tools
that the Department of Revenue has to look at the corporate
return and determine whether there’s an accurate inclusion
of income and whether income is being shifted outside the
State. That is one of the scenarios that combined
reporting has cited as one of the benefits of including all
income so that you’re not able to, at least within the
U.S., have an inappropriate income shifting, but it’s not
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the only tool available.
DEMOCRATIC CHAIRMAN WHEATLEY: Sure. Which also
adds a cost currently that we could probably do without if
we had a combined reporting system.
But anyway, according to my information, all but
one of Pennsylvania’s 31 largest private employers, which
is 97 percent, operate in States that have combined
reporting already. And of those, 21 of those operate in
five or more States that have combined reporting already.
It is my understanding, as I think through your testimony,
most of these corporations, if not all of them, file
Federal forms that they combine all their incomes or their
revenues anyway generally already. So they’re already
submitting to the Federal Government their combined
revenues for purposes of Federal taxation.
MR. HOGROIAN: No, sir. The Federal return is a
consolidated return and it’s different from the State
combined returns. The main difference -
DEMOCRATIC CHAIRMAN WHEATLEY: I guess before you
-- they do a combined something to the Federal Government
already about all of their subsidiaries, all of their
holdings. They’re reporting it somewhere in a combined or
in a consolidated way somewhere to the Federal Government.
MR. HOGROIAN: Well, not all but it’s based on
the U.S. resident corporations --
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DEMOCRATIC CHAIRMAN WHEATLEY: Well, I know all
but one in Pennsylvania is doing it because they're doing
it in other States anyway, combining their -- so when you
talk about the cost associated with these companies, if
they're already doing it, all but one already doing it in
other States and some of them are doing it in multiple
States, how could that be an additional cost for them to do
it in Pennsylvania?
MR. HOGROIAN: Well, sir, the consolidated return
at the Federal level is U.S. resident corporation basis
return, whereas the combined returns in the States are
based on unitary group calculations. So that unitary
combined group is going to be different than what is
employed at the Federal levels. So it's an entirely
different return with a different group or groups. The
unitary rules, as applied by the States, vary. States have
unitary tests, which are Constitutional restrictions but in
statute and developed through State case law. So unitary
groups can vary between the States based on each State's
specific application.
And then finally, each State has its own
corporate tax regime on which the unitary combined return
is overlaid. So there is no standard unitary combined
filing method. There is a multistate tax commission model
combined reporting law where a few of the newer States have
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adopted elements or used that as the basis for their
implementation. But I think it’s fair to say that every
State’s combined reporting regime is different.
DEMOCRATIC CHAIRMAN WHEATLEY: Well, I thank you
for your presentation. I’ve been told that I need to move
on but I will say if they’re already doing it in other
States, I don’t see how they can have an additional cost in
Pennsylvania. So thank you for your presentation.
MR. HOGROIAN: Thank you.
MAJORITY CHAIRMAN O ’NEILL: Thank you, Chairman.
As we move on, of course Chairman Wheatley always
gets latitude to go on a little further, but I would ask
the other Members of the Committee when you’re asking your
questions to be a little more concise and move on.
So, Mr. Grove, you’re the first test of the
theory.
REPRESENTATIVE GROVE: I’ll serve you well,
Chairman.
You testified Vermont, West Virginia, and New
York recently passed combined reporting. Do 100 percent of
businesses in those States now pay taxes?
MR. HOGROIAN: Well, it depends on the inclusion
in the unitary group. As I mentioned before, you’re going
to have about the same number of zero returns under a
combined reporting as separate. You’re including loss
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companies outside the group; you’re combining separate
filing entities that are unitary within the State. If you
had two zero returns, you’re going to get a zero return.
REPRESENTATIVE GROVE: So even with combined
reporting, you’re still going to have businesses that have
no income because they have a loss. And that’s a
difference between an individual file and a business
filer -
MR. HOGROIAN: Right.
REPRESENTATIVE GROVE: -- where individuals are
paying on their wages. And I don’t know -- on a wage you
get a zero loss for that, a negative return. You either
have a salary or you do not have a salary, correct?
MR. HOGROIAN: Correct. And there are also
corporations that file for regulatory purposes that don’t
have income in the State and those will come up as zero
returns as well. There’s credits and other -
REPRESENTATIVE GROVE: Yes.
MR. HOGROIAN: -- tax attributes that will create
a zero return.
REPRESENTATIVE GROVE: And last question, can you
explain the difference between an add-back in a combined
reporting and what is more effective at revenue generation
and also more effective as creating a better business
climate? Thank you.
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MR. HOGROIAN: Let’s say the add-back is narrowly
focused at income streams that are deemed to have a high
potential for shifting income outside the State. So
Pennsylvania, with respect to intangible expenses where you
have a payment for royalty where intangible property can be
located anywhere; I’m assuming there’s substance to the
transaction.
For example, trademarks are actually maintained
outside the State; there’s actually a substance to that.
Still, there’s a payment for use of the intangible in
Pennsylvania and that will reduce Pennsylvania taxable
income. The add-back is focused at those specific income
streams, and then there are exceptions for legitimate
business activities. That would be business purpose and
economic substance, for example.
So to the extent that the exceptions to an add-
back are crafted in such a way that they don’t encompass
legitimate intercompany payments, which do reflect
profitability as opposed to income-shifting, then there is
not the same negative impact on jobs and investment.
MAJORITY CHAIRMAN O ’NEILL: Thank you very much.
Next is Representative Davis.
REPRESENTATIVE DAVIS: Thank you very much,
Mr. Chairman.
Thank you so much for your well-researched
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testimony on combined reporting.
Does this reflect a point of view?
MR. HOGROIAN: Well, we’re a membership of about
600 U.S. and multinational corporations, so it reflects -
and we generally interact with the State tax directors and
tax departments at our members companies. So it’s the tax
department, let’s say, major U.S. corporations’ point of
view. And the research that we submitted we commissioned
Ernst & Young to perform the research, so that’s an
independent study.
REPRESENTATIVE DAVIS: So you would say that the
point of view is against combined reporting?
MAJORITY CHAIRMAN O ’NEILL: I’d rather not go
down that road. I understand why you’re asking the
question but -
MR. HOGROIAN: Well, I’d say in testimony in
other States we’ve provided testimony with respect to
specific proposals, but the research is meant to stand on
its own as an objective analysis of combined reporting and
its effects.
REPRESENTATIVE DAVIS: Okay. Just one or two
other questions if the Chairman would allow. Could you
explain in detail the difference between Federal
consolidated rules and combined reporting rules?
MR. HOGROIAN: Sure. Well, the Federal
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consolidated rules have intercompany deferral mechanism for
intercompany transactions, whereas combined rules will
often apply on elimination principle. So they often vary
significantly in terms of the treatment of intercompany
payments between the combined group, which is treated as
one entity, and the consolidated rules at the Federal
level.
There’s also a significant difference between the
composition of the group. The Federal consolidated group
is based on 80 percent ownership among U.S. incorporated
entities without respect to nexus rules or the unitary
principle, whereas the State unitary group, which is
subject to the combination, is subject to the unitary
business principle, which can create multiple groups within
that Federal consolidated group.
And then there’s a nexus overlay as well, and
that applies to the composition of the group, if it’s a
nexus combination or consolidation at the Federal level.
It also impacts the apportionment regime, and so
apportionment is another variation that’s very significant
to the tax result at the State level that you don’t have at
the Federal level. So each State has its own apportionment
regime, some more heavily weighted towards sales factor,
others three-factor apportionment. And the inclusion, for
example, of sales in the apportionment factor is going to
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vary depending on nexus of the members. And that's a very
significant variation. It can create large differences in
tax liability at the State level that doesn't apply at the
Federal level.
REPRESENTATIVE DAVIS: Okay. I'd love to unpack
that, but with respect to the Chairman's request, I'm not
going to. I just have one final question, which is of the
States in the Northeastern part of the country that have
adopted combined reporting, have any businesses pulled out
of those States?
MR. HOGROIAN: Well, I think there's two answers
to that question. First of all, there's an ability to sell
a business so that you break unity. So if the tax result
is not a good tax result for maintaining that instate
investment within the unitary group, the out-of-state
business could sell off an instate asset.
REPRESENTATIVE DAVIS: Has that happened?
MR. HOGROIAN: I believe most likely it has.
REPRESENTATIVE DAVIS: Do you have evidence that
that happened?
MR. HOGROIAN: Well, I think the revenue effects,
as we've measured them in combined reporting States,
indicate that it has happened to a degree but I couldn't
give you a number on the behavior that that results.
REPRESENTATIVE DAVIS: Thank you.
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MAJORITY CHAIRMAN O ’NEILL: Thank you.
Representative Roae.
REPRESENTATIVE ROAE: Thank you, Mr. Chairman.
The whole issue of the corporate income tax, it’s
a very important issue because we collect -- it’s like 2 or
2.5 billion dollars a year corporate net income tax in
Pennsylvania. So despite some companies that don’t pay
very much, it’s still a big part of our budget. About 8
percent of our State budget is from the corporate net
income tax. So a lot of companies are paying it or we
wouldn’t be collecting $2 billion.
But my question -- actually there’s two parts my
question -- is if we did pass the law for combined
reporting, what kind of impact do you think it would have
on CPA firms in Pennsylvania that help companies do their
tax forms? What impact would it have on the curriculum at
our colleges in Pennsylvania, our business schools that
have accounting programs, business majors, the impact on
the Department of Revenue as far as training and
qualifications for the employees and stuff to be able to do
everything with the different type of setup?
And then the second part of the question is if we
did do it, what kind of time frame should there be for a
delay? I mean could we make this effective exactly a year
from today, April 15th, or should it be like a two-year
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delay so companies can get ready for it, training can take
place among accountants and stuff? Should there be a five-
year delay? I mean how quickly could this feasibly be
implemented?
MR. HOGROIAN: Thank you. With respect to the
first part of the question I think there would be a
significant impact on CPAs and tax attorneys in the State
would probably generate business for them. But, no, it
would take a significant amount of retraining for your
instate CPAs.
Regarding corporate taxpayers and the Department
of Revenue, there would be a steep learning curve and it
would be dependent, as you said with respect to the second
part of the question, the implementation period because
passing a combined reporting law just beings the inquiry as
to how it will actually be applied. And just very basic
things like I ran through the pre- and post-apportionment
question of how you combine the income and factors I don’t
believe is generally clear under some statutory regimes
once they’re implemented and then you have to go to the
regulations once they come out to actually get the details
of the combined report.
I know in the District of Columbia, for example,
which went to combined reporting, there was significant
problem with getting the regulations out and there had to
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be corrective legislation once the regs came out because
the regs showed a flaw and the enacting statutes had to be
corrective legislation, which happened during the
implementation, the first year of return filing, which even
on the extended return there was not a settled set of
regulations in place. So the lead-up to implementation is
an important issue.
REPRESENTATIVE ROAE: So would you think that
rather than have it be effective for April 15th of 2016, if
we did do it, we should make it effective for the taxes
that are due in 2017 instead? Or how much of a lead time
should there be?
MR. HOGROIAN: Well, I think from the taxpayers’
point of view you would need a regulatory structure in
place in plenty of time for the first return. I think that
would be a fair question for the Department of Revenue in
terms of how long it would take them to implement a
regulatory regime and provide the forms, et cetera. Just
our experience has been that, yes, it would take probably
that long to actually have it implemented.
REPRESENTATIVE ROAE: Okay. Thank you so much.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Representative Dean.
REPRESENTATIVE DEAN: Thank you, Mr. Chairman.
And good morning. Thank you for your testimony.
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It’s important to us as policymakers to try to
figure out the wisdom of combined reporting or separate
entity reporting, so I appreciate your information.
REPRESENTATIVE DEAN: To make this more tangible
to the common man like me, who are we talking about? What
companies are we talking about? What layer or level of
businesses are we talking about that would be subjected to
combined reporting in Pennsylvania?
MR. HOGROIAN: Any company that has more than two
entities operating within a common ownership structure. So
a single company is not going to file a combined report.
REPRESENTATIVE DEAN: Okay.
MR. HOGROIAN: But it could be a small business
where you have a separately incorporated convenience store
or something like that and another business that’s
separately incorporated. You have to determine whether
there’s a unitary relationship because it’s not just common
ownership.
REPRESENTATIVE DEAN: And do you have some sense
of the numbers, what we’re talking about? I think you said
your organization represents really the 600 national,
multinationals, so it definitely impacts all of your
members?
MR. HOGROIAN: Right.
REPRESENTATIVE DEAN: Okay. And then also, as
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you said, it could impact smaller businesses?
MR. HOGROIAN: Absolutely.
REPRESENTATIVE DEAN: Okay.
MR. HOGROIAN: It really goes to the structure of
your business. If you have only one incorporated entity
but it's common to have a store or something like that
separately incorporated.
REPRESENTATIVE DEAN: And some of your 600
members are who?
MR. HOGROIAN: In all industries. On the
letterhead for our testimony is our Board of Directors, so
you can see them, but the entire list is available in our
annual reports, but pretty well saturated within the larger
corporations in America.
REPRESENTATIVE DEAN: Okay. Something else you
talked about were distortions and the distortions that
might arise as a result of combined reporting. Can you
identify some of the distortions that already exist as a
result of separate entity reporting? And I know
distortions is a bit of a euphemism. It's pretty foggy.
But distortions, when we are doing separate entity
reporting, are beneficial to companies when they're able to
do different things legally in order to create tax
avoidance. What are some of the distortions we right now
live under as a result of separate entity reporting?
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MR. HOGROIAN: Well, certainly it goes to the
intercompany payments and whether those are legitimate
intercompany payments or not. The question regarding
intangible payments, for example, which are now subject to
an add-back in Pennsylvania, that’s designed to look at
whether there’s a distortion in effect there.
REPRESENTATIVE DEAN: Again, to make it more
tangible, isn’t one distortion, for example, that an entity
can move profits to a State with a more favorable tax
benefit to them and get the profits out of Pennsylvania,
for example? Isn’t that a distortion that results?
MR. HOGROIAN: Let’s say a business moves
operations outside of Pennsylvania, which is a result you
don’t want, to the extent that there are profits generated
in another State, it’s not a distortion.
REPRESENTATIVE DEAN: Okay.
MR. HOGROIAN: To the extent there isn’t
substance to a payment going outside of the State, there
isn’t a substance and a business purpose to that payment,
then there would be a distortion.
REPRESENTATIVE DEAN: Again, to just go back to
the idea, as policymakers, we’ve got to figure out which
set of distortions is the right one, the most equitable
one.
And then finally, to your point of burdensome,
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I’ve been in business small and medium, not large but small
and medium, and the financial reporting is burdensome.
There is no doubt about it. But it exists. It is a part
of the business world. For me, I don’t understand the
argument that it’s too tough; therefore, we shouldn’t have
to do it because it also doesn’t make sense because any
banking reporting that an entity does or multiple entities
do are extremely complex, extremely taxing, needing of CPAs
and lawyers. So I don’t understand the "it’s burdensome”
argument.
MR. HOGROIAN: Right. If it was worth the
burden, and that’s a decision for policymakers to make, if
it’s worth the burden in terms of the additional tax
collected perhaps or for the principle of fairness -
REPRESENTATIVE DEAN: Right.
MR. HOGROIAN: -- then that would be an argument
for -- just like any regulatory burden, so it’s a burdens-
and-benefit analysis.
REPRESENTATIVE DEAN: I think those are the exact
hallmarks, you know, what is the right burden and what is
the fairness and what’s collected. Thanks so much.
MR. HOGROIAN: Thank you.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Representative Milne.
REPRESENTATIVE MILNE: Thank you, Mr. Chairman.
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Well, good morning, and thank you for that
excellent primer on what is certainly a very complex and
specialized topic, so I think this is a very helpful
hearing that we’re having here this morning.
I have a couple questions in relation to the
metrics that you cite between combined reporting and some
economic considerations. One, I noticed in your testimony
that you made a linkage between combined reporting as part
of a State’s tax code, and during the Great Recession, some
States experiencing a 16 percent greater decline in
economic activity. Could you speak a little bit to that
and why that seems to be the cause and effect?
MR. HOGROIAN: Thank you. Certainly, the tax
burden within a State is going to influence the amount of
economic activity within the State, so the combined
reporting effect in those States appear to have exacerbated
the tax impact within the State in less investment there.
So it’s an observed impact in the combined reporting
States.
There are other factors likely at issue there.
It’s the kind of States that have combined reporting and
it’s those kind of factors are certainly at play as well.
REPRESENTATIVE MILNE: Certainly. Certainly.
And then excluding the consideration of the Great Recession
in general, we also heard some testimony about the effect
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on job creation, job retention, regardless of whether we’re
in a recession at the time or not. What’s the causal
effect there between combined reporting and impact on job
creation and job trends?
MR. HOGROIAN: Just regardless of profitability
of the members, certainly in terms of investing in a State
having a certain tax environment is important for capital
investment and job creation. One of the disadvantages of
combined reporting is that you have uncertainty with
respect to implementation, what kind of combined reporting
regime is going to be put in place, whether there is a
deduction to allow for the financial reporting impact of
combined reporting. Those are all uncertainties with
respect to implementation.
Once combined reporting is in effect, there’s
also the uncertainty that’s generated through the audits,
through the complexity of the return, but also the
uncertainty in terms of the unitary combined group and
whether the tax liability can be much greater on audit
where a profitable affiliate is brought in by an auditor
because, frankly, of the tax result.
REPRESENTATIVE MILNE: Thank you.
Thank you, Mr. Chairman.
MAJORITY CHAIRMAN O ’NEILL: Next is
Representative Daley.
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REPRESENTATIVE DALEY: Thank you, Mr. Chairman.
And thank you for being here today.
So according to your website, your organization
believes that combined reporting could lead to a loss of
jobs, lower wages, and a higher cost for goods and
services. The proposed budget calls for a decrease in the
corporate net income tax, along with combined reporting.
So with that in mind, does your organization’s prediction
seem likely an outcome?
MR. HOGROIAN: I think with respect to lowering a
corporate rate, it does ameliorate the impact, so the lower
the rate, the less the distortion. It doesn’t negate those
effects but it certainly lessens them.
REPRESENTATIVE DALEY: Okay. Good, thank you.
And then one other thing, my understanding that
your organization worries that a change in the tax
structure such as a move to combined reporting could
negatively affect a business’ stock price and value. So
how would you suggest that combined reporting be adopted in
Pennsylvania to mitigate any potential temporary reduction
in market value?
MR. HOGROIAN: Well, specifically there are
concerns regarding the financial statement impact.
Massachusetts has FAS 109 deduction that’s spread over a
period of years. But just to focus on that, for example,
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that deduction in subsequent years has been delayed so that
it still is not available to a company. So there comes a
point at which this question of whether that deduction will
ever become available and that can negatively impact a
corporation’s financial statement.
REPRESENTATIVE DALEY: But does your organization
have advice that you could give to Pennsylvania on measures
to mitigate negative impacts? I mean you gave
Massachusetts -
MR. HOGROIAN: On that specific issue, actually a
financial impact statement we do, not regarding a combined
regime overall, like we don’t have a model combined
reporting statute that would have what we see as favorable
elements.
REPRESENTATIVE DALEY: Okay. Because at some
point I think that could be helpful to us if we were to get
information about different States and how it’s impacting.
I’m sitting here, I’m trying to hold my tongue,
but part of the argument that it’s burdensome also comes
across to me as this is hard and I don’t know, it’s just
not a convincing argument for reason to avoid this because
I worked at a university in the financial areas. We had
all kinds of different units that all ran up. I’m not
suggesting that businesses are like universities but there
are systems we have these days to help us with different
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things, so the argument that it's burdensome and difficult,
it seems as though the initial impact of any implementation
could be difficult and lots of questions, and I would
imagine that as you go on, it becomes easier.
So some of the States that have had this for a
number of years, is that the case, or is it every single
year, every single reporting you run into this burdensome
situation that has a really negative impact on the
business?
MR. HOGROIAN: I'd say because there was this 20-
year lull between adoption of combined reporting, so we
really had some very subtle regimes -- of course they're
always changing as well and California is not, for example,
seen as by any means a simple return, so I wouldn't say
that it's ever truly worked out in California, for example.
Maybe that's the nature of the economy there and how
complex the return is going to be in California.
But with respect to the recent combined reporting
adoption signed in Vermont in 2006 and forward, I think the
States are still struggling with implementation. So I
haven't seen a smoothing yet in terms of the compliance.
Massachusetts, for example, has been working on it, has
rescinded some of the schedules that they put out there,
and because they didn't think that they were working, they
were unduly burdensome, so I mean the Department of
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Revenue, for example, they’ve been working with taxpayers
to try to smooth some of the difficulty.
REPRESENTATIVE DALEY: But have States overturned
their combined reporting requirements completely?
MR. HOGROIAN: No. What States have been doing
instead, the trend that I would say in terms of
simplification is a number of States have been implementing
-- Michigan most recently adopted a consolidated return
option, so they went to combined reporting and had a single
business tax that was separate for many years. They went
to a modified business tax. Now, they have a true
corporate income tax on a combined basis. But I think it
was last year, adopted last year or the year before, a
consolidated option to use the Federal consolidated group.
So that addresses one issue of complexity that I mentioned
in my testimony.
REPRESENTATIVE DALEY: Okay. Thank you.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Representative Kaufer.
REPRESENTATIVE KAUFER: Thank you, Mr. Chairman.
I just have a couple of questions with your
testimony. You mentioned about 6 percent higher job growth
without combined reporting in States. I’m wondering if
there’s a big discrepancy between big business and small
business in those numbers that you’re reporting or are you
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aware of any discrepancy between those two?
MR. HOGROIAN: I’m not aware of the composition
there, so it would be constructive to look at, although -
REPRESENTATIVE KAUFER: Yes, and I’m curious to
see what those numbers would be.
MR. HOGROIAN: I guess with respect to whether
there’s even small business but whether they’re subject to
combined reporting or not because they have multiple
entities or not.
REPRESENTATIVE KAUFER: And one of the things you
mentioned, too, in your testimony was the cap on net
operating loss deduction. Can you comment on that in
regard to our State versus what other States are doing? I
kind of read between the lines of your testimony that we
need to lift it in our State is I think what you’re
proposing, and I’m wondering what you were proposing or
what we’re looking at in our State as opposed to our other
States?
MR. HOGROIAN: To the extent that a net operating
loss is restricted and a corporation can take advantage of
the loss, then there’s an increased distortion there
because the unitary combined return is meant to reflect the
profitability of the enterprise, and a separate return is
meant to reflect the profitability of that single entity.
The cap on NOLs results in a distortion of that because the
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loss is not allowed to offset the profit and the company or
unitary enterprise looks more profitable than it really is
and the tax is applied to that.
REPRESENTATIVE KAUFER: So what do other States
do in regard to this that we are not on par with what some
of our surrounding States are doing?
MR. HOGROIAN: Well, the trend during the
recession like when there were budget problems in the
States was to look at NOL suspension, for example, not that
that’s the right policy but it was a way of increasing
revenue when States wanted it. And the trend has been to
let those suspension periods expire now and go back to the
way the NOL was supposed to operate. I say in terms of the
term of the NOL, States have been conforming more to the
Federal 20-year carryforward, so there have been I’d say as
a general trend now is towards loosening restrictions on
NOL utilization. The cap is unique in Pennsylvania so -
REPRESENTATIVE KAUFER: Well, it seems like this
is a critical part of the conversation where we’re at in
regard to combined reporting. If we’re trying to make a
level playing field, it seems like that’s certainly going
to be at the heart of this discussion as well. Just one
little comment, we talk a lot about the Delaware loophole
and that’s sort of in the background of all of our minds on
this discussion, and I think --
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MAJORITY CHAIRMAN O ’NEILL: Representative,
you’re getting into policy -
REPRESENTATIVE KAUFER: Okay.
MAJORITY CHAIRMAN O ’NEILL: — and [inaudible].
REPRESENTATIVE KAUFER: I just want to say just
in regard to that, it happens for a reason, so I hope that
we will be getting to a more business-friendly tax
structure, however that may be with this or without it. So
thank you very much.
Thank you, Mr. Chairman.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Next is Representative Kinsey. Thank you.
REPRESENTATIVE KINSEY: Thank you, Mr. Chairman.
Good morning.
MR. HOGROIAN: Good morning.
REPRESENTATIVE KINSEY: Again, I want to thank
you for your testimony this morning. I just have a
question as it relates to the research that COST has done.
I guess in your presentation and when you come up with your
analysis, do you take into consideration maybe other
studies that may have been done? And I guess I’m talking
particularly one that I’m aware of was the Multistate Tax
Commission. So when you do your analysis and present the
research and testimony that you did today, does that also
come into consideration?
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MR. HOGROIAN: That study in 2008 took into
account the studies that were done to that date. There
have been subsequent studies. One I mentioned was the
University of Tennessee study, which I believe was 2010,
and then there was a statutory commission in Maryland that,
through information reports, performed an analysis of the
revenue impact of combined reporting. Rhode Island also
recently performed a study with their department. So the
MTC study I’m not aware of. I know they have a model
combined reporting -
REPRESENTATIVE KINSEY: Sure.
MR. HOGROIAN: — statute.
REPRESENTATIVE KINSEY: Right. So then in your
analysis there are other studies that have been looked upon
and included into your testimony? Is that -
MR. HOGROIAN: Yes, sir.
REPRESENTATIVE KINSEY: Okay, great. Thank you.
From another perspective, and we talk about
fairness -- and, Mr. Chairman, if I’m getting off key with
this, please let me know because I don’t want to get into
policy -- but in part of your testimony you’ve talked a
little bit about fairness. From an overall standpoint, I’m
not sure how I would include the combined reporting, but in
general if we were looking at lowering the tax rate for
businesses --
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MAJORITY CHAIRMAN O ’NEILL: That’s borderline,
yes.
REPRESENTATIVE KINSEY: Okay. All right.
MAJORITY CHAIRMAN O ’NEILL: [inaudible].
REPRESENTATIVE KINSEY: I’ll come back to that
then. Thank you, Mr. Chairman.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Representative Quigley.
REPRESENTATIVE QUIGLEY: Thank you, Mr. Chairman.
Just real quick, I know in answering a previous
question you had said that some States that have adopted
the combined reporting, the companies in there have sold
off portions of their company to make it more favorable.
Is that true?
MR. HOGROIAN: Well, that’s certainly one
technique that could be used to break unity.
REPRESENTATIVE QUIGLEY: Okay.
MR. HOGROIAN: So it’s one way to mitigate the
tax result.
REPRESENTATIVE QUIGLEY: Okay. So in other words
if a State were to adopt -- and this I think is any
taxation policy -- but if a State were to adopt this
combined reporting, resourceful accountants/attorneys
within the corporation could find a way to mitigate the
impact of that tax policy. Is that a fair statement?
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MR. HOGROIAN: Well, it is but also I would say
that within the unitary analysis, that's a subjective
analysis, and I think from the States' auditing, there is
an inherent bias towards including an entity that's going
to result in a higher tax. And from the business' point of
view, there's going to be an inherent bias towards
mitigating the tax liability. So the subjective nature is
going to result in some variation between what the taxpayer
puts on the return and what the Department asserts.
REPRESENTATIVE QUIGLEY: All right. So in other
words, when these States adopted the combined reporting
statute, whatever estimate they thought was going to be
brought in in income could very well not be the case if
some of those other steps were taken such as selling off
companies within it -
MR. HOGROIAN: Well, right, and it also might
discount the impact of including loss entities. It might
discount changes in the economy as well. So the revenue
estimate could be done during an up period, and then if
there's a decline in corporate profits, those revenues,
similar to tax revenue overall.
REPRESENTATIVE QUIGLEY: Okay.
MR. HOGROIAN: So it's hard to extract in some
ways what the impact is because you're looking at corporate
tax volatility overall.
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REPRESENTATIVE QUIGLEY: Right.
MR. HOGROIAN: And that’s inherent in the
corporate tax.
REPRESENTATIVE QUIGLEY: Okay. And is there any
data in your studies that have shown what a State had
thought they were going to bring in and then after period
of time what actually was brought in?
MR. HOGROIAN: Yes, we can look at the revenue
effects. Again, the corporate tax is going to be volatile
as it is, so it’s subject to the economic conditions and
not merely to the filing method.
REPRESENTATIVE QUIGLEY: Okay. All right. Thank
you.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Thank you, Mr. -
MR. HOGROIAN: Hogroian.
MAJORITY CHAIRMAN O ’NEILL: Hogroian. I
appreciate it. I thank you for traveling up here and
giving the time and your testimony and answering all the
questions.
MR. HOGROIAN: Certainly. I appreciate it.
Thank you very much.
MAJORITY CHAIRMAN O ’NEILL: I appreciate it very
much. It was very helpful.
We’ve been joined by -- of course two of them
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already testified, Representative Dean and Kaufer, as well
as Representative Daley. And Acosta is here, too, I think,
Representative -
MS. FOX: She was.
MAJORITY CHAIRMAN O ’NEILL: She was here. She
left. Okay. Great. Thank you.
Our next set of testifiers are the panel of
Pennsylvania Chamber and PICPA, which is the Pennsylvania
Institute of Certified Public Accountants. So if they’re
here, please come up.
We have Tom Bowen from the Chamber and we have
Raymond Chopper from PICPA, as well as Matthew Melinson.
Gentlemen, before you begin your testimony, I
really would just like to state for the record that our
previous testifier really went into a lot of gray area and
not necessarily what we’re trying to accomplish here, and
so I gave the Members a lot of leeway on what their
questions were as well because it would have only been
fair. So I’m asking you to just stick to the agenda of
educating the Members about combined reporting and how it
works so that they can understand that.
So who wishes to go first?
MR. CHOPPER: Okay. Thank you. It’s a pleasure
being here. Thank you, Chairman and Members of the
Committee.
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By way of introduction, my name is Ray Chopper.
I spent about 12 years with the Commonwealth and the Bureau
of Corporation Tax and about 25 years with Coopers &
Lybrand, now PricewaterhouseCoopers where I retired about
nine years ago as a State and local tax partner.
Matt?
MR. MELINSON: Matt Melinson. I’m State and
local tax partner for Grant Thornton and have been with
that and a legacy firm for about the last nine years. I
spent the 10 years before working for this guy at
PricewaterhouseCoopers and I began my career in tax
collection also.
MR. CHOPPER: I’d like to first start off with
the PICPA’s position on combined reporting. And we’re
neutral. We’re neither for it or against it and have been
that way since 2004 whatever Governor Rendell at the time
had come out with his Tax Commission. And the reason for
that is simply, as you look at our members, and I can
attest to this, we have clients that if you go to combined
reporting are going to be winners and we’re going to have
clients that are going to be losers on both ends of the
stick. So we’ve always taken the position of trying to be
neutral.
What we’re trying to do today without going too
deep into the weeds of combined reporting is to point out
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some things that you as the Legislature needs to take into
account if in fact you decide to go with the combined
reporting. The goal is to try to get as many issues,
technical issues, cleared up inside the legislation as
opposed to being ambiguous and ending up in court
constantly over and over again. So while we may talk about
issues that combined reporting brings, we’re only doing
that so that the legislation that, if it does, that
ultimately comes out of here out of the House and the
Senate, is to the point that it clarifies the way combined
reporting should be in Pennsylvania.
I’d like to kind of bring it down to a little bit
of a practical and give you an example. We talked about
who’s in the combined return versus a consolidated return
for Federal tax purposes. An example that I’ve used before
with combined reporting is let’s assume you have ABC Oil
Company, the parent, and it owns gas stations here in
Pennsylvania. That’s all it does in Pennsylvania; it owns
gas stations. But it has 100 subsidiaries out there. And
some of those subsidiaries include a company up in Alaska
that explores for oil, another company up in Alaska that
drills for oil, another company that transports the oil to
the port. They have a refinery in Louisiana and ultimately
the gas is pumped to Pennsylvania to the gas stations here.
If you’re looking at a very simple combined
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return, that’s it. You would say, gee, the exploration,
the drilling, the transportation, the refining all relate
to the gas station business in Pennsylvania so they should
all be inside the unitary return. That’s easy.
Now you begin to get into the more practical
side. Let’s assume ABC Oil Company owns a building in
Houston, Texas, that they rent out. Should that be
included in the combined return in Pennsylvania? Well,
I’ll tell you from my experience what it’s going to be is
if that building operates at a loss, the company is going
to say, yes, it should be included in the combined return.
If it operates at a profit, the Department of Revenue is
going to say, yes, it should be included in the combined
return. And both are going to have good reasons it should
be.
If it should be included, they’re going to say,
gee, the money to buy that building came from the oil
business, so therefore, it should be part of the unitary
return. If you don’t want it in the return, you’re going
to say, well, rentals have nothing at all to do with the
oil business in Pennsylvania so it shouldn’t be in. So
you’re going to have this conflict at least initially, at
least initially. You’re going to have this conflict as to
who goes into the unitary return.
And I can tell you California did it 40 years ago
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or whatever and there are still court cases in California
as to who goes in and who goes out of the unitary return.
And with ABC Oil, the parent with a hundred or hundreds of
subsidiaries, you’ve got to take a look at each one of
those subsidiaries and decide which one of those end up in
the unitary return, which again, the unitary is totally
different than the Federal consolidated return.
I guess the other issue that you have is why are
we doing this? For fair taxation, that’s possible. But
broaden the base, that’s possible. And I don’t know that
anybody can predict how much of an increase in the base
combined report would do in Pennsylvania versus separate
companies. I think the Legislature two years ago with Act
52 went a long way with the add-backs of intercompany
interest and royalties in PA. They went a long way in
taking care of the so-called Delaware investment holding
company loophole because you’re forced to do that add-back
today on a separate company return.
I believe what happened is by doing that, the
incremental amount from -- and again, it sounds like we’re
against it; we’re just talking from a practical standpoint
-- the incremental amount, because we have the add-back, of
combined reporting, all we’re saying is make sure you have
a decent number or know what the number is or a good
estimate of what the number is with combined reporting from
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separate companies because it is a change. It is a massive
change.
Is it difficult? No, it's not impossible. Other
States have done it, companies do it, yes. But there are
issues involved in going from separate companies to
combined reporting. Training from the Department of
Revenue standpoint, that's an issue they you're going to
have to go through. I was there. I know what that mindset
is, the mindset of separate companies to combined
reporting. Their computer system, they just implemented a
new computer system in Department of Revenue for the core
tax. They've had issues with it. They're working on
correcting it. That's fine. But that system is built on
separate company reporting. You're going to have to change
that entire system over to a combined reporting.
One of the Representatives asked how long would
it take to do that? I don't believe you could say, all
right, as of 1/1/2016 we're going to go to combined
reporting and everybody will be ready. I don't believe
that would happen. I think it would take some time in
order to do that.
MR. MELINSON: If I could interject a couple of
comments. I think to kind of bring things back, first of
all, I thought they were fantastic questions earlier, and I
know both Ray and -- I fire away and we're happy to take on
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whatever you have here. That’s what we’re here to serve
you and to try to provide some information. That’s our
job.
And while we do represent taxpayers, we also do
serve on governmental committees. For example, I serve in
the City of Philadelphia’s Revenue Commissioner Advisory
Committee. We both serve on State committees where we’re
helping the government, so we understand our role today we
want to play that for you.
We do believe, and I do personally believe, and I
know Ray agrees, that there is a little bit of I would call
it a risk of a flawed premise here. And let me take you
through that. Both Ferdinand and Ray alluded to Act 52 of
last year and I think everybody gets that, the add-back
provision and how that may have impacted things, but if we
rewind the clock even back to the 1990s, there’s not a
doubt in the world about it. You had smart guys like this
guy out there doing strategic tax planning and things he
doesn’t want to tell you about here and stuff.
But the bottom line is that there was certainly
an element in a separate company State where there was
clearly an element of planning in the taxpaying community.
But as the years have gone on, 2004 you did the Tax Reform
Commission for the Commonwealth of Pennsylvania, and at the
time I think that was still kind of prevalent then, but
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since that time you had the whole fallout from Enron I’m
going to call it, you had things like the Sarbanes-Oxley
you may be familiar with, right, where the CFO is really on
the hook for a lot of the stuff. He’s got to sign his name
to personal things and be personally accountable for a lot.
The biggest thing I might point to is you may be
familiar with FIN 48. It’s now called ASC 740. It’s an
accounting pronouncement, which in my opinion materially
shifted the pendulum away from what I’ll call aggressive
kind of gunslinging -- that’s probably overstating it -
but an aggressive potential taxpaying environment where you
could get into some positions towards a much, much more
conservative environment that perhaps arguably favors the
government in that regard because it’s just not worth the
aggravation for reasons we could get into in further detail
if you’d like for taxpayers. They’re not going to get a
book benefit, to cut to the chase, when they engage in tax
planning, or the book benefit may be severely limited. So
you kind of keep moving on through the years and then other
States have attacked this.
And you might say, well, why does it matter what
other States do? We’re Pennsylvania. It definitely
matters because the businesses we’re really talking about
here, the majority of these are multistate businesses. And
for multistate businesses, they might say, okay, well, I’m
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getting a benefit in Pennsylvania, New Jersey, New York,
Maine, Rhode Island, et cetera. Guess what? They’re not
getting the benefit in those States anymore so it’s not
worth it to them anymore.
So I know Ray said he spent the last couple years
of his career shutting down holding companies.
MR. CHOPPER: I did.
MR. MELINSON: That was 10 years ago.
MR. CHOPPER: Yes. Before I retired, the last
two years, 18 months before I retired I probably spent as
much time wrapping up Delaware investment holding companies
I set up for my clients years ago, wrapping them up and
turning them into either LLCs or merging them back into the
parent company, again, because they just weren’t useful
anymore. It wasn’t worth the aggravation of running them.
MR. MELINSON: Yes. And I think I could just
tell you again from personal experience the last one that I
saw -- we have a very large State and local tax practice.
We have 30 people in the City of Philadelphia. This is all
they do for a living. It’s kind of high-end State and
local consulting and compliance. And the last one I’m
aware of is probably 1998 or so, ballpark, that somebody
actually set that up offensively. Now, there are certainly
still some remnants of the old days still hanging around
undoubtedly.
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So kind of the way I visualize this gap that
exists, the tax gap, has shrunk over the years because of
all the reasons we just -- and then you put Act 52, you
layer that on top, and you’re capturing the majority. So
in my opinion if I was looking at it from your perspective,
I’d kind of be looking at it saying at this point -- I
think it was Representative Roae up top that said it was
about 2.5 billion, about 8 percent of the revs.
Like Ray, to tie his point and put a bow on it a
little bit, query how much money is out there. I kind of
view this is maybe some final scraps here. I personally
don’t think that there’s a material amount to be had there.
That said, there can be arguments made on the
for-and-against side as to whether this is sound tax
policy. So if you think it’s good tax policy from a
general perspective, go for it, proceed, take a look at it,
and support it. But if you don’t think it’s good tax
policy, you’d view it the other way. But I think if the
premise that a lot of this is predicated upon is based on
potential revenue generation or that we’re going to go get
these taxpayers that are out there kind of shifting income
around, I kind of think it’s a dated premise. I don’t want
to say it’s nonexistent; there’s probably still little bit
of an element there, but I think it’s much, much, much less
than it was at the time of the Reform Commission in ’04.
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MR. CHOPPER: All right. And again, getting back
to some of the other issues, yes, there’s a learning curve
for us out there, CPAs, too, not maybe as much myself and
Matt because we’ve worked for large firms; we’ve dealt with
multinationals. But where you’re going to see it is the
midsize firms, the smaller firms. It’s a learning curve
for their people because they may have not necessarily
"small businesses,” but they may have midsize businesses
that have done business in PA and Jersey and Maryland,
which are all separate company States that now their
subsidiaries may need to be combined here. So it’s going
to be a learning curve on our members also, our 22,000
members that are out there.
Again, we’re trying to bring out some issues, and
it may sound like we are against it. We’re really not.
It’s just trying to bring out the issues that get clarified
in the legislation, worldwide versus water’s edge,
understanding -- or elective worldwide. These issues have
to be resolved in the legislation. It can’t be left for
the Department to use their judgment. And it’s unfair to
the taxpayer if the Legislature doesn’t firm up all these
issues, the weeds I’ll say, of combined reporting in the
legislation and leave it wide open to subjectivity on the
Department’s part or even on the taxpayers’ part.
MR. MELINSON: Yes, and I think Ray alluded to
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terminology, sort of terms of art that hopefully you
appreciate: worldwide versus water’s edge. So if you go to
the theory of combined reporting, if you really follow that
theory through to its fullest extent, you’d say I want to
get the whole world in, right, any activity that’s going on
throughout the world.
But back to the benefits and burdens conversation
from earlier, the majority of the States have decided we
really don’t want to get into that. We don’t want to get
into translating into U.S. dollars and really, really
complicated potential tax returns here for taxpayers.
But with that, there’s other elements of
potential planning that go on. You can get into State tax
planning that involves the use of the entire world and now
you have a little bit of a trend moving towards States
trying to enact what they’re calling tax haven legislation
in a combined reporting regime to say, well, if your income
happens to be in Barbados or Aruba or some non-taxing
regime, we want to pull those back in.
So like I said, we’re trying to give you some
nuances. You’ve got some issues. One of the
Representatives over here said you’ve got some distortions
now, you’ll have some distortions going forward under
combined, either way. It’s kind of a matter of what do you
think is the best out of the two policies.
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There's certainly some practitioners that will
tell you a sound theory to try to wrap it all in and take
smaller piece of that pie, but there are certainly nuances.
Ray touched on a couple of them. This concept of what's in
a unitary group, Ferdinand in some of the Q&A was hovering
around. That's not one I would take for granted. There's
no doubt that there'll be litigation on that issue. Like
Ferdinand said, the taxpayer is going to look at it and
you're going to land in the gray where a lot of our lives
are in the gray or our work.
You say, okay, taxpayer, I think I can get to
this answer so the taxpayer is going to take the most
favorable position. The State is going to see it a
different way and that's where you'll lead to the
controversy and litigation. So it's just kind of a new way
of attacking some of these corporate tax issues.
MR. CHOPPER: Right. And again, I think we're
just talking about issues that the Legislature, if they
decide to go with combined reporting, needs to look at.
The apportionment issue, how do you apportion the income?
Is it Joyce versus Finnigan, and again, those are two court
cases out in California. The net operating losses -
MAJORITY CHAIRMAN O'NEILL: Could you do me a
favor and kind of wrap up?
MR. CHOPPER: Sure.
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MR. MELINSON: Yes. Yes.
MAJORITY CHAIRMAN O ’NEILL: [inaudible].
MR. CHOPPER: Okay. Questions at this stage?
MAJORITY CHAIRMAN O ’NEILL: We’ll get through
[inaudible].
MR. CHOPPER: Okay.
MR. MELINSON: Okay.
MR. BOWEN: Do you prefer my testimony before we
have questions, Mr. Chairman?
MAJORITY CHAIRMAN O ’NEILL: Yes.
MR. BOWEN: Okay.
Well, Chairman O ’Neill and Chairman Wheatley and
Members of the Committee, we thank you for this opportunity
to present our views on mandatory combined reporting.
My name is Tom Bowen. I serve as Chair of the
Tax Committee for the Pennsylvania Chamber. From a
personal level I have been practicing tax law probably more
years than I can remember that about four decades’ worth,
and 30 of those have been in Pennsylvania. I started my
practice in the Federal side, as a lot of the folks who
have been practicing this long have and started actually
with the Internal Revenue Service, and then I migrated into
State and local tax primarily when I came to Pennsylvania
in 1984.
And about half of the years I’ve been here I have
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been working for a multinational corporation that did
business in both separate entity States and combined
reporting States, as well as worldwide. And then for about
five years I was with one of the big four accounting firms,
and the last 10 plus years I’ve been with the law firm
where I do both tax litigation and tax planning principally
in Pennsylvania.
The Pennsylvania Chamber is the largest broad-
based business advocacy association in the Commonwealth.
We represent businesses of all sizes ranging from Fortune
100 companies to sole proprietors crossing all industry
sectors. Our membership comprises nearly 50 percent of the
private workforce.
To avoid duplication, I’m going to dispense
reading portions of my written testimony, which I know you
have in front of you.
I will point out, though, that we do look at the
issues of business competitiveness and also predictability
both for the Commonwealth’s finances and for predictability
for clients and businesses, as well as fairness and
simplicity. An often-debated tax policy is the tax base,
which we’re talking about today.
As with most of the States, and we count about 24
States with mandatory unitary combined reporting, the
language we’re looking at now in Pennsylvania generally
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limits the group of corporations to those that are formed
or having significant operations in the United States,
which is what we refer to as water’s edge. However, the
language that we’ve seen also would include corporations
that are businesses in so-called tax havens.
MAJORITY CHAIRMAN O ’NEILL: I’m sorry, but you’ve
crossed the line. I can’t let you go down that road.
You’re actually speaking to a policy and -
MR. BOWEN: The particular -
MAJORITY CHAIRMAN O ’NEILL: -- the proposals and
I -- yes, please. Thank you.
MR. BOWEN: Okay. Thank you, Mr. Chairman.
I thought I would just at least address what tax
haven means because certain States have adopted that
language and you may see it in some form of some proposal.
But our count there’s five small States -- it’s
footnoted at footnote 1 -- that have adopted a tax haven
inclusion. A tax haven inclusion means a foreign
incorporated entity but happens to be incorporated in
certain foreign jurisdictions that are either defined in
the statute or they’re defined by reference to some other
measure. That does add an additional element of
complexity. As I noted, the five States that have adopted
that are fairly small States in terms of population and
business activity.
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The background in Pennsylvania that’s already
been alluded to in 2004, the Governor then appointed a
commission to study this issue and there have been
proposals over the years.
As far as the reference I think earlier has been
to -- and maybe I’m getting beyond here when I say loophole
closer -- but in terms of fairness issue, and in my view
and in practicing in Pennsylvania as long as I have is
Pennsylvania Department of Revenue does have sufficient
authority and they have exercised that authority -
MAJORITY CHAIRMAN O ’NEILL: I’m going to have to
shut you down. I’m sorry.
MR. BOWEN: I’m sorry.
MAJORITY CHAIRMAN O ’NEILL: [inaudible].
MR. BOWEN: I see. Okay.
MAJORITY CHAIRMAN O ’NEILL: I’m trying to be fair
to everybody in the purpose of the hearing and it’s -
MR. BOWEN: Okay. I don’t mean to be critical -
MAJORITY CHAIRMAN O ’NEILL: You’re pushing your
testimony to one side -
MR. BOWEN: Pushing the envelope?
MAJORITY CHAIRMAN O ’NEILL: -- and that’s not
what I’ve asked to happen, so I apologize. So -
MR. BOWEN: No, I understand that.
MAJORITY CHAIRMAN O ’NEILL: So if you could just
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wrap it up and add to it and then we’ll move forward.
Thank you.
MR. BOWEN: No problem. I understand that.
MAJORITY CHAIRMAN O ’NEILL: And I appreciate your
coming.
MR. BOWEN: Sure. One point I think is very
important for this Committee that hasn’t been brought up
before, and this is not a policy debate here, but it’s
revenue projections. We obviously are facing challenging
fiscal issues this year. And I can tell you that revenue
projections for a major change like this is going to be a
huge challenge.
And let me just throw out a scenario. We checked
with some of our corporate members of our committee. Let’s
take a scenario that is not far-fetched at all. A company
would take the view that they’re not unitary with some
certain subsidiaries, certain maybe profitable
subsidiaries, and so they report those entities that they
believe aren’t unitary but the amount of tax reported may
be significantly less than a tax auditor may view the same
numbers.
If they report that way in the year it’s
effective, that’s the year the Commonwealth would receive
the revenue. And by the time that company might be
audited, that could be another one or two or three years.
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And when you go up the chains of appeals, you could be
looking at five or six years before a revenue is resolved
with regard to a change like this.
And my point to the Committee here is I would
certainly ask the Revenue Department and others who are
looking at revenue projections to consider that time
impact, the time sensitivity impact. You need revenue now,
as I understand it, and a major change like this made defer
the realization of that revenue.
We’ve talked about complexity, and I will say
this -- and again, this is a factual issue -- virtually
every State of the 24 plus States that have unitary
combined reporting have their own particulars. There’s no
uniformity countrywide. And I know that from personal
experience.
I’ll just add two things that Pennsylvania has
unique to the complexity. One has been raised; I won’t get
into it unless you want me to, and that is the net
operating loss limitations. And we would be one of two
unitary States, if unitary was adopted, unitary combined
reporting, with a cap on NOLs. The other issue I heard a
mentioned was the tax haven issue. If you add those two,
you’re talking about added complexity.
We talked about the burden on the Department of
Revenue, and I just want to add to that that again, there’s
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a lead time that’s necessary to train the people at
Revenue. They’re very good people but they have a lot on
their hands right now, and to add this to their mix leaves
a lot of extra lead time for training, and also the
adoption of regulations, which is a rather long process in
Pennsylvania. And that’s important for guidance.
And due to the subjective nature, as we’ve
already talked about, of what is a unitary group, I would
expect -- and again, this is not a policy debate -- but I
would expect in my experience in other States that we would
see significant additional cost to businesses, as well as
to the Commonwealth in terms of appeals in litigation.
And the closing paragraph here is many of
Pennsylvania’s major competitor States do not use combined
reporting. And again, as a factual matter, I believe most
of us realize that we compete quite vigorously with States
like Virginia, the Carolinas, Maryland, Delaware, and New
Jersey, and as a matter of record, none of these States
utilize mandatory combined reporting.
And the final point would be, at the time that we
are strongly advocating for workforce development that
bridges the gap between jobseekers and the employment needs
and growing industries of the Commonwealth has to be very
careful about enacting policies that may move us in the
wrong direction.
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And with that, I'd be glad to take your
questions.
MAJORITY CHAIRMAN O'NEILL: Thank you. I
appreciate it.
If Chairman Wheatley doesn't mind, I'm going to
deviate a little because someone has to be somewhere and he
has to ask questions, so Representative Dunbar.
REPRESENTATIVE DUNBAR: Thank you, Chairman. I
do appreciate it.
I apologize but I do have several meetings I've
been pushing back.
I've been very subdued over here and holding my
tongue and I'm going to make sure I don't overstep any
lines. And this is an educational hearing. And in
testimony I did hear I believe Mr. Chopper reference FIN
48, and I think it is something that's very important that
the Committee does understand exactly what FIN 48 is and
what effect it has had on multistate corporations.
Essentially, accounting for income taxes -- I don't know
the exact title of it -- Uncertainty in Income Taxes I
believe is the exact title, which was 2007, 2008, somewhere
around in there.
If you could just help explain a little bit more
in detail of how that has affected multistate corporations,
how they may have changed what they're doing, which also
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relates to your last comments about projected revenues.
Because of FIN 48, those projected revenues may not be what
people may expect. So if you could just elaborate on that,
I’d appreciate it.
MR. CHOPPER: Yes. FIN 48 came into being in
that you’ve got to understand with a large multinational
entity, their focus and their CEO, CFO’s focus is on book
income, not necessarily, like ours, cash. It’s focused on
book income because that’s what goes out to the
shareholders, to the stock market, and so on, and so forth.
What FIN 48 does or did, it basically said if you
have an uncertain tax position or an aggressive tax
position that you’ve taken, and you feel beyond a shadow of
a doubt that it’s good, nobody would challenge it, all
right. If the answer is, no, somebody could challenge it,
then you’re not allowed to take the benefit of that savings
in your book income. You have to account for it is if you
paid the tax in that book income and record the tax,
whether it be 100 percent, 50 percent, 20 percent, but the
company does not get to recognize that tax savings in their
book income because of the uncertainty in the tax position
they took.
And because of that, a lot of entities that used
to use tax havens or Delaware holding companies, they
decided to get out of it because there wasn’t a book
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benefit to the company, and without a book benefit, trust
me, multinationals without a book benefit, they don’t do
anything. They really don’t.
REPRESENTATIVE DUNBAR: Thank you.
MR. CHOPPER: I hope that answers your questions.
REPRESENTATIVE DUNBAR: It does. Thank you.
MAJORITY CHAIRMAN O ’NEILL: Representative
Wheatley.
DEMOCRATIC CHAIRMAN WHEATLEY: Thank you,
Mr. Chairman. Thank you, Mr. Chairman, and thank you,
gentlemen, for your presentation.
I wanted to begin, like the gentleman with the
CPA organization, I have no bias one way or the other, but
I do believe as Pennsylvanians we should explore all
options around how we create a system that’s fair and
equitable for all of our businesses to compete. And I’ve
heard from each of you reference the 2004 commission, and
in that commission under Rendell, looking at the
composition, the business community, as well as those who
might be from your organizations, were well represented and
their ideology were well represented in that commission’s
work, is that correct?
MR. CHOPPER: Yes.
DEMOCRATIC CHAIRMAN WHEATLEY: So in that report
there was a set of recommendations. I wanted to kind of
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highlight a part of the -
MS. FOX: [inaudible].
MAJORITY CHAIRMAN O ’NEILL: [inaudible].
DEMOCRATIC CHAIRMAN WHEATLEY: Well, because they
mentioned it, I think it’s important because combined
reporting itself was talked about and explored -- and in
that, the business community and all those who were a part
of that process came out with a recommendation that
essentially said basically that because the issues that are
related to Pennsylvania tax system and the environment that
we wanted to create to make it more business friendly -
and I’m just going to highlight this one point -- "to
address these issues, the Commission recommends that the
corporate net income tax base be determined on a mandatory
unitary combined basis. The Commission supports the
adoption of the mandatory unitary combined reporting only
in conjunction with the reduction of the corporate net
income tax rate to within the range of 6 to 7 percent."
Now, the reason why I wanted to read that is
because not only in this report does it talk about creating
that fair system, we mentioned earlier that 71 percent of
our corporations or businesses right now don’t pay this
corporate tax, that the ones that are exploring them, 14
percent, 15 percent of them pay less than $1,000, not based
on trying to get more revenue in the system but it was
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based on trying to make sure we created a fair environment
to compete.
And if that was true and that was something that
many of your organizations and industries that you
represent supported in 2004, what has changed since 2004 to
today that says now combined reporting is somehow not a
solution that we should address or conform to?
MAJORITY CHAIRMAN O ’NEILL: Yes, I apologize. I
don’t think it’s a fair question because you only reported
to what it was, not what it did, and he’s asking you
questions specifically to what it did so -
DEMOCRATIC CHAIRMAN WHEATLEY: Well, I’m talking
about combined reporting itself because part of this is
about the complexity, the fairness, and about if it does
what it says we want it to do if we engage in it. And what
I’m saying is based off of what was agreed to in 2004,
based upon what you all have said to us today, it seems to
me that in 2004 it was considered a fair system, an
equitable system. Reading your 10 good principles around
what makes good tax policy, you talk about making sure the
minimum tax gap, making sure fairness and equity was a part
of it.
And so my only, I guess, question based off of
2004, the work that many of these good gentleman and people
who they represent was a part of, suggested combined
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reporting was a good avenue to go. So if that was good in
2004, today I’m hearing they have these challenges and
questions that we should consider. But I would like to
know what changed from 2004 to today.
MR. BOWEN: I’m happy to take a shot at it if you
guys would like -
MR. CHOPPER: I would, too.
MR. BOWEN: Okay.
MR. CHOPPER: I testified for the Commission, and
basically my testimony back in 2004 to today was exactly
the same. Again, from my client’s perspective and the
Institute’s perspective, we don’t care whether you adopt or
not because there’s going to be winners and losers. And if
the Legislature feels it’s good tax policy and fair tax
policy to adopt combined reporting, so be it. All we’re
trying to do from the PICPA standpoint is, again, it may
sound like we’re against it; we’re not. We’re just trying
to point out issues that need to be addressed in the
legislation so that we avoid a lot of appeals and court
decisions down the road. That’s all.
Matt?
MR. MELINSON: Yes, and I’ll just add I mean
really what this constitutes in some ways is a tax shift.
How do you do it? Kind of I view it as like a pie. How
does Pennsylvania determine what is their fair share of the
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pie for a multistate -- potentially in some cases
multinational business? And the U.S. Supreme Court has
spoken and said there's no perfect way to do that
basically. You've got to get in this concept called
apportionment and basically the concept is to try to get a
reasonable estimate. So if anybody thinks that the
combined reporting is a reasonable estimate, and the
Commission thought that, that's certainly one way to do it.
There's not been anything wrong with that. A lot of States
have gone that route, were comfortable with it.
The separate company reporting, it's a little
easier for people to get their arms around probably. I've
got this company -- and especially for like, say, just a
company that's only in PA, then it's a piece of cake. You
just file in PA as opposed to say you've got 100 companies,
Ray's example, in that case you've got to aggregate all the
100 and then you got to get into this complex apportionment
factor. So it's not to say one or the other is better.
You can do it either way.
I would say two things. One, you asked what's
changed since 2004. I kind of tried to describe earlier
the environment has changed a little bit. So there was
certainly an undertone of that commission is we know that
there's a big tax gap. That was, I would opine, an
undertone of the Commission there. I don't know that as
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much of that exists. I’ll leave it to others to determine
numbers and things like that. But I’m kind of in the weeds
on this stuff. I’m very confident it’s a low tax gap in
the specific area these days.
So I think that’s the only thing that’s changed
but, like I said, I don’t disagree, Representative
Wheatley, that is a reasonable way of going at the tax
system.
DEMOCRATIC CHAIRMAN WHEATLEY: And again, I don’t
want to belabor this point because I don’t think anyone
here wants to punish businesses. I think we want to help
business grow in this Commonwealth. And again, I guess
where I’m try to get to is I don’t know if the premise is
solely around revenue generation, as some may suggest. I
think the conversation is really around how do we make sure
-- because when we’re talking about this universe, we’re
not talking about the majority of businesses that operate
in Pennsylvania. Seventy-one percent of them, this
conversation doesn’t even matter. It’s not going to impact
them.
We’re talking about a smaller group of
businesses, many of whom operate not only just in
Pennsylvania but they operate outside of Pennsylvania.
They have subsidiaries outside of Pennsylvania. And how do
we create a fair environment, a competitively fair
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environment that they compete with, just those businesses?
Because some of them have industries competing with
businesses that only have organizations in the
Commonwealth. How do we make it a fair environment?
And so at the end of the day I think that’s where
a lot of my Members here on the Democratic side want to
figure out. I think that’s where the Governor is trying to
figure out. And I think that’s why he’s also willing to
bet on this by suggesting dropping the corporate net income
tax well below what you talked about in your report in
2004.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
DEMOCRATIC CHAIRMAN WHEATLEY: So thank you for
being here.
MAJORITY CHAIRMAN O ’NEILL: Thank you.
Gentlemen, thank you for being here today.
MS. FOX: I need to ask my question.
MAJORITY CHAIRMAN O ’NEILL: Oh, I’m sorry. Tammy
has one question.
MS. FOX: I do have one quick question.
Has anybody ever looked at combined reporting
from our uniformity clause perspective in terms of the fact
that you could have two similar businesses, and with the
unitary definition being so subjective, that one business
could be being treated differently? And I know we’re one
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of the only States that still has a uniformity clause. So
has that been looked at anywhere?
MR. CHOPPER: I’m smiling because when we met
before we came up here at the PICPA office, I said to Peter
and Matt, I said, gee, that dawned on me last night. Do I
have a uniformity issue? I am not an attorney. So, Tom,
you can take it.
MR. BOWEN: Yes, Ms. Fox, I do think that’s a
very significant issue. I didn’t raise it here. We had
enough other issues. But I would expect, through
litigation, this will certainly, if this is adopted, may
well go to -- frankly, I think even the add-back that’s
already been enacted may be a question of uniformity as
well. So I think that’s a very fair question.
And if I could just maybe go back to
Representative Wheatley’s question -- okay, I won’t. I
think he’s been answered well.
But, yes, I think that’s a serious concern.
MS. FOX: Okay.
MAJORITY CHAIRMAN O ’NEILL: Thank you, gentlemen.
I appreciate you for being here today.
MR. CHOPPER: Thank you.
MAJORITY CHAIRMAN O ’NEILL: And I thank the
Members and everyone else who came out.
And this hearing is now closed. Thank you. Have
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1 I hereby certify that the foregoing proceedings
are a true and accurate transcription produced from audio
on the said proceedings and that this is a correct
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Christy Snyder
Transcriptionist
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