Combined Reporting Act
Summary: The Combined Reporting Act requires that multi-state corporations apportion their income fairly among the states where they do business.
SECTION 1. SHORT TITLE
This Act shall be called the “Combined Reporting Act.”
SECTION 2. COMBINED REPORTING FOR CORPORATE INCOME TAXES
After section XXX, the following new section XXX shall be inserted:
(A) DEFINITIONS—In this section:
1. “Affiliated group” means one or more chain(s) of corporations that are connected through stock ownership with a common parent corporation and meet the following requirements:
a. At least 80 percent of the stock of each of the corporations in the group, excluding the common parent corporation, is owned by one or more of the other corporations in the group; and
b. The common parent directly owns at least 80 percent of the stock of at least one of the corporations in the group. “Affiliated group” does not include corporations that are qualified to do business but are not otherwise doing business in this state. For purposes of this section, “stock” does not include nonvoting stock which is limited and preferred as to dividends.
2. “Common ownership” means the direct or indirect control or ownership of more than 50 percent of the outstanding voting stock of:
a. A parent-subsidiary controlled group as defined in Section 1563 of the United States Internal Revenue Code of 1986, as amended, except that the amount of 50 percent shall be substituted for all references to “80 percent” in such definition;
b. A brother-sister controlled group as defined in Section 1563 of the United States Internal Revenue Code of 1986, as amended, except that the amount of 50 percent shall be substituted for all references to “80 percent” in such definition; or
c. A common parent corporation of an affiliated group of corporations. Ownership of outstanding voting stock shall be determined in accordance with Section 1563 of the United States Internal Revenue Code of 1986, as amended.
3. “Corporate return” or “return” includes a combined report.
4. “Doing business” means any transaction in the course of its business, including:
a. The owning, renting or leasing of real or personal property within this state; and
b. The participation in joint ventures, working and operating agreements, the performance of which takes place in this state.
5. “Foreign corporation” means a corporation that is not incorporated or organized pursuant to the laws of this state.
6. “Foreign operating company” means a corporation that:
a. Is incorporated in the United States; and
b. Conducts 80 percent or more of its business activity outside the United States. “Foreign operating company” does not include a corporation that qualifies for the Puerto Rico and Possession Tax Credit provided pursuant to Section 936 of the United States Internal Revenue Code of 1986, as amended.
7. “Unitary group” means a group of corporations that are related through common ownership, and, by a preponderance of the evidence, are economically interdependent with one another as demonstrated by the following factors:
a. Centralized management;
b. Functional integration; and
c. Economies of scale.
8. “Water’s edge combined report” means a report that combines the income and activities of all members of a unitary group that are corporations organized or incorporated in the United States, including those corporations qualifying for the Puerto Rico and Possession Tax Credit as provided in Section 936 of the United States Internal Revenue Code of 1986, as amended, and corporations organized or incorporated outside the United States that meet the threshold level of business activity.
(B) COMBINED REPORTING REQUIRED
1. If any corporation does business in [State] and is a member of a unitary group, the unitary group shall file a water’s edge combined report. A group of corporations that are not otherwise a unitary group may elect to file a water’s edge combined report if each member of the group is doing business in [State], is part of the same affiliate group and is qualified pursuant to Section 1501 of the United States Internal Revenue Code of 1986, as amended, to file a federal consolidated return.
2. Each corporation within an affiliated group that does business in [State] shall file a combined report. If an affiliated group elects to file a combined report, each corporation within the affiliated group that does business in [State] shall file a combined report.
3. A corporation that elects to file a water’s edge combined report pursuant to this section shall not thereafter elect to file a separate return without the consent of the [Comptroller].
4. If two or more corporations, whether or not organized or doing business in this state, and whether or not affiliated, are owned or controlled directly or indirectly by the same interests, the [Comptroller] shall be authorized to distribute, apportion or allocate gross income or deductions between or among such corporations, if the [Comptroller] determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or to clearly reflect the income of any such corporations.
5. The [Comptroller] shall, by regulation, make adjustments to [State] taxable income when, solely by reason of the enactment of this section, a taxpayer would otherwise receive or have received a double tax benefit or suffer or have suffered a double tax detriment.
6. A group that files a combined report shall calculate federal taxable income of the combined group by:
a. Computing federal taxable income on a separate return basis;
b. Combining income or loss of the members included in the combined report; and
c. Making appropriate eliminations and adjustments between members included in the combined report. For purposes of this subsection, if an entity does not calculate federal taxable income, then the federal taxable income shall be calculated based on the applicable federal tax laws.
7. For purposes of the apportionment provisions within [citation to state law], corporations filing a combined report shall not include inter-company sales or other transactions between the corporations included in the combined report when determining the sales factor. Inter-company rents between members of a combined report may not be considered in the computation of the property factor.
(C) ENFORCEMENT
The [Comptroller] shall promulgate regulations consistent with this section in order that the tax liability of any affiliated group of corporations that files a [State] consolidated income tax return, and of each corporation in the group, before, during and after the period of affiliation, may be returned, determined, computed, assessed, collected and adjusted, in a manner that accurately reflects the [State] taxable income derived from sources inside the state, and in order to prevent avoidance of such tax liability.
SECTION 3. EFFECTIVE DATE
This Act shall take effect on July 1, 2007 and shall apply to tax returns filed for any tax year beginning on or after January 1, 2007.