Fact Sheet
How Does Combined Reporting Work?
Combined reporting is a change in the tax code that would require corporations with subsidiaries or affiliates to file a single tax return that lists all of the conglomerate’s business activity, rather than treating each subsidiary as a separate entity. Companies would no longer be able to shift money between subsidiaries to veil profits and avoid paying taxes in a particular state.
How Do Corporations Avoid Paying Their Fair Share?
Corporations exploit flaws in Maryland’s tax code that allow them to minimize their tax burdens. According to the Comptroller of Maryland, 64 of the 132 largest for-profit corporations in Maryland don’t pay any state taxes.
Some known corporate tax evasion schemes include:
- Transferring funds to a trust owned by the company itself and top management to reduce taxable profits, as was done by Wal-Mart.
- Using “transfer pricing,” where one subsidiary sells goods to another subsidiary at inflated prices to concentrate profits in subsidiaries in low-tax rate states.
- Establishing trademark holding companies such as the one Toys ‘R’ Us uses to avoid state taxes by transferring profits to a tax-free Delaware subsidiary that collects licensing fees for use of its Geoffrey Giraffe icon.
Unfortunately, corporate accountants are constantly devising new tax avoidance schemes. Instead of engaging in a loophole arms race, combined reporting offers a comprehensive solution to a host of corporate tax avoidance strategies.
Combined Reporting Will Benefit Maryland
Estimates of how much revenue combined reporting will bring in range from $25 million to $150 million. Because conglomerates currently aren’t required to report overall profits, it is difficult to calculate exactly how much money combined reporting will generate for the state.
Combined reporting will level the playing field for Maryland businesses that compete against multi-state companies.
Maryland citizens overwhelmingly favor corporate tax reform. In a recent poll 87 percent of respondents said they believe companies that earn profits in Maryland should be required to pay state taxes.
Combined Reporting Has Become the Norm
Four years ago only 16 states, representing 29 percent of the U.S. economy used combined reporting. Now 21 states have adopted the practice - representing 51 percent of the economy. Seven additional states are considering the change.
Combined-Reporting-Fact-Sheet.pdf