If a multistate corporation doing business in North Carolina shows signs of shifting income around to avoid paying state taxes, the state’s Department of Revenue has authority to require additional information to be sure the company’s not simply offshoring its profits. But that may be about to change.
In the last hours of North Carolina’s legislative session this year, the House and Senate passed a two-pronged bill that will legally allow multistate corporations doing business in North Carolina to avoid paying corporate income taxes rightfully owed to the state.
First, the bill limits the Department of Revenue’s power to demand companies “combined reporting,” i.e., fully disclose income for all of a company’s subsidiaries, regardless of their location.
Under the new law, the Secretary of Revenue could only force a combined report if transactions between subsidiaries have no "reasonable business purposes" other than reducing the corporation’s tax liability. As the NC Budget and Tax Center noted, “corporate accountants could easily restructure tax shelters and give them the appearance of "business purposes," even if the primary purpose was to, in fact, reduce corporate taxes.”
Second, the bill reopens the egregious “royalties and trademark loophole” closed by legislators ten years ago. Multistate corporations operating in North Carolina with headquarters out of state will now be allowed to charge their North Carolina entities for the right to use the corporations’ trademarks. There is no limit to the ‘charge’ for this privilege and as such, it can (and will) be used to offset profits made in North Carolina for any given tax year resulting in zero state tax liability.
Speaking out against the amendment, House member Jennifer Weiss said, "We are telling multistate corporations, 'Come on over, rip us off, we won't charge you any taxes, but we're going to tax the little guy…Go ahead, cheat us, it's legal."
House Majority Leader Paul Stam argued that affording corporations the confidence that they can, in fact, avoid taxes if they move to the state was “extremely important to the economy of North Carolina.” He added that “of all the bills we've had this session, this is the jobs bill."
The bill now awaits the signature of Governor Bev Perdue.
Earlier last week, the Republican led legislature overrode the governor’s veto of the damaging state budget they crafted. News of this last minute move to support corporate interests over the public interest is even more disturbing in light of the fact the state already has a budget in place that severely underfunds all levels of education, eliminates thousands of state workers and limits access to health care.
Photo via Jimmy Wayne Creative Commons Attribution License 2.0