United States: Alabama Legislator Introduces Broad Unitary Combined Reporting Bill

Last Updated: March 19 2015
Article by Bruce P. Ely and James E. Long, Jr.

As part of Republican Governor Robert Bentley's eight-bill revenue package, Representative Mike Hill (R-Columbiana) has introduced a mandatory unitary combined reporting bill (often called "MUCR"), H.B. 142, that would be retroactively effective for tax years beginning after December 31, 2014. During the Governor's 2015 State of the State address last week, he summarized the bill as follows:

If Alabama families have to pay their fair share of taxes, so should large national and international corporations. Almost two-thirds of the corporations operating in Alabama paid ZERO income tax [for 2012]. Of the 3,000 Fortune 500 corporate tax returns filed in Alabama, almost 58% paid no income tax to our state [for 2012]. By requiring combined reporting, we will eliminate that loophole.

Many groups are busy analyzing the impact of this proposal, although both the Council On State Taxation (COST) and the 5,000-member Business Council of Alabama have long opposed legislation of this nature. Additionally, the heavy manufacturing, forestry products, and chemical producers trade association, Manufacture Alabama, has announced its opposition to the bill. The Alabama Society of CPAs may also vote to oppose the bill.

According to COST President and Executive Director, Doug Lindholm:

Combined reporting doesn't close loopholes, it simply substitutes one set of distortions for another set of distortions. It is based on imprecise (constitutional) standards, and therefore will inevitably lead to lengthy audits and protracted litigation. It also impacts taxpayers differently—benefiting some and harming others. Thus the revenue impact is highly speculative. Finally, it fails to close a "loophole" in the corporate income tax. The Department of Revenue currently has all the tools necessary to ensure that income is fairly reflected on separate state corporate income tax returns, including add-back statutes and well-established standards for arm's length pricing. To the extent the ADOR believes it lacks the necessary tools, it should define the problem and request of the Legislature the resources and policy changes needed to even-handedly enforce Alabama's tax laws.

Lindholm also pointed to a COST analysis on the lack of effectiveness of MUCR in other states and suggested that legislators and the ADOR study the COST report on combined reporting. He also noted that many of the larger companies doing business in Alabama in 2012 either had suffered losses that year or were utilizing net operating loss carryovers from previous years of the "Great Recession," so the 58 percent figure used by Governor Bentley was not surprising. As noted in the COST report, Alabama's percentage of corporate returns with no income tax reporting is on par with the experience of combined reporting states, other separate reporting states, and the federal corporate income tax, which suggests that the method of filing is not determinative of the percentage of returns that report a tax liability.

The bill would also repeal the current consolidated filing option for corporate income taxpayers, including the Alabama Legislature's express prohibition on MUCR, codified at Alabama Code section 40-18-39(i).

Surprisingly, the official revenue impact ascribed to the bill is only an increase of approximately $20 million per year. Other analysts predict that the revenue increase from this bill, if enacted in its present form, may be as much as ten times that number. One of the major reasons for the latter estimate is that—unlike the MUCR proposals introduced in the 2008, 2009, 2011, 2012, and 2013 legislative sessions—this bill specifically restricts the use of tax credits, net operating losses, and other post-apportionment deductions by allowing only the member that generated the attribute to utilize the credit or deduction, not the unitary group as a whole.

The bill closely parallels the Multistate Tax Commission's ("MTC") Proposed Model Statute of Combined Reporting, except that it doesn't provide any common ownership threshold in determining whether an entity is included in the unitary group. Almost all other states that impose MUCR (and the MTC's model regulations) require at least 50 percent common ownership.

The committee hearing on this bill could be scheduled as soon as next week and, unlike the predecessor bills, the authors understand there is a greater likelihood that this bill will move forward. Alabama joins Pennsylvania and Maryland in the list of state legislatures currently considering MUCR proposals this session.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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