Overview
Loophole
(noun): An ambiguity, especially an unintended one, in the text of a
law or contract that makes it possible to avoid a difficulty or
obligation.
In-state
businesses are playing on an uneven field, competing against
multi-state companies that use high-priced, sophisticated accountants
and complex transactions with subsidiaries to avoid paying
Massachusetts taxes. While currently legal, some multi-state
businesses can shift their Massachusetts profits to out-of-state
subsidiaries to avoid paying taxes here; while businesses located
only in Massachusetts cannot take advantage of these loopholes or
other tax shell games.
Businesses
should thrive based on their efficiency and innovation, not their
opportunities for ‘creative’ tax accounting and tax avoidance.
Existing
tax loopholes, totaling over $500 million a year, allow mostly
out-of-state businesses to avoid their fair share of taxes. That
leaves the vast majority of businesses at a competitive disadvantage.
It also leaves taxpayers – both businesses and individuals – to
foot the bill for vital services including transportation, education,
and public safety.
MASSPIRG
supports the following measures to put an end to tax-avoidance plans
and close tax loopholes.
“Check
the Box” – Some
businesses designate themselves as a corporation at the federal level
and then avoid taxes by using a trust designation at the state level,
for example. “Check the box” closes this loophole by simply
requiring corporations to choose and be taxed as the same corporate
structure in Massachusetts as they choose to be classified at the
federal level. Under the
rule, businesses can not call themselves a corporation at the federal
level and then avoid taxes by designating themselves as a trust, for
instance, for Massachusetts state tax authorities. In the current
system, companies that do not have the ability to shift around their
corporate form are put at a serious competitive disadvantage.
Massachusetts is one of only five states that have not yet closed
this loophole by requiring businesses to "check-the-box"
and designate a consistent corporate form. The others states which
still have this loophole are Tennessee, Texas, New Hampshire and
Michigan.
Combined
Reporting – This
change would prevent multi-state companies from shifting their
Massachusetts profits to out-of-state subsidiaries to avoid paying
taxes here. Combined reporting requires companies with subsidiaries
and affiliates to file taxes in a single combined report and then
apportions taxes according to the combined group’s in-state
business activity.
Combined
reporting is the best practice to determine the amount of corporate
profits that are linked to a company’s activity in any given state.
Without combined reporting, companies have an incentive to create a
thicket of subsidiaries and trusts across state lines, and then to
arrange complex transactions between them to avoid taxes. With
combined reporting, companies and their affiliates instead file
jointly and then assess taxes based on their combined business
activity within a state. The practice eliminates the need for the
Department of Revenue to audit companies to check for sham
transactions between companies and their out-of-state subsidiaries.
Combined
reporting is critical in order to level the playing field for
Massachusetts-based businesses that compete with national or
multi-state businesses. The Multistate Tax Commission, a quasi-public
entity composed of state revenue departments around the country,
offers model legislation for combined reporting. States have
introduced combined reporting as a way to modernize tax systems that
were originally crafted at a time when few companies operated across
state lines. Twenty states have passed combined reporting laws,
including our neighbors in New Hampshire, Maine, and Vermont, and
most recently, New York . Governors in Iowa, Michigan, North
Carolina, and Pennsylvania this year have also called for the
practice.
Insurance
Companies Operating Non-Insurance Businesses
– Insurance companies have long been granted lower tax rates on
profits because the prices they charge for insurance are regulated.
But many insurers have used their lower tax status to branch into
other unrelated business activities where there is no justification
for the lower rates. There is no reason that businesses competing
against the subsidiary of an insurance company should be put at a
competitive disadvantage. Insurers should be taxed at the same rates
as other businesses when they engage in non-insurance activities.
Telecom
Loophole – First
adopted in 1915 as part of a government initiative to bring
telephones to homes when the industry consisted of one phone company,
Bell Telephone, with publicly established profit margins. This
loophole initially exempted telephone companies from paying ‘rent’
for the use of telephone poles. Today – over 90 years later –
every utility company from NSTAR to Comcast is required to pay
property taxes on above-ground poles and wires and/or their switching
equipment, while telephone companies like Verizon are exempted. This
loophole should be closed. It serves no modern public purpose,
prevents more efficient use of public space, and forces local
assessors to waste taxpayer dollars chasing after questionable claims
by companies who are both utilities and telecoms.
Deeds
Excise Loophole –
Some companies create a temporary shell “partnership” to avoid
the real-estate transfer tax. Once the sale of property is finalized,
sellers can dissolve the partnership without ever paying the
real-estate transfer tax. We should close this loophole and assess
taxes on all real-estate transfers.
Internet
Hotel and Reseller Loopholes
– Right now, internet hotel booking companies to pay less tax than
in-state hotels and motels do on the same sales. These companies
typically pocket the difference between the higher tax amounts they
charge consumers based on the retail room rate and the actual taxes
they turn over to the state based on lower wholesale room rates. We
should close this loophole and require that these booking companies
pay taxes on the price they charge the consumer.
