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.