In May, Vermont became the seventeenth state in the nation to close a loophole that major chain retailers are using to evade paying state income taxes.
The loophole allows multi-state corporations to shift income made at stores in Vermont to subsidiaries in low- or no-tax states like Delaware and Nevada. Income shifted in this manner, although earned in Vermont, is not subject to the state’s corporate income tax.
Similar loopholes exist in about half the states. Most major chains, including Toys R Us, Home Depot, The Gap, and Wal-Mart, employ the accounting scheme to circumvent paying part or all of their taxes in these states. Experts believe the practice is costing states billions of dollars in lost revenue.
It’s also creating an uneven playing field for independent businesses. Those with all of their operations in only one state cannot take advantage of the loophole.
“Huge companies pay only a minimum $250 tax while our homegrown Vermont businesses, particularly our small businesses, pick up the rest of the tab,” Governor Jim Douglas said last January when he announced his support of legislation to close the loophole.
The governor gave an example of three multi-state companies (he did not name them) that had $6 billion in combined revenue in Vermont last year, but paid only $750 in state income taxes. He then cited three local businesses with combined revenue of $700 million that paid $7 million in state income taxes.
Vermont closed the loophole by adopting a system known as combined reporting, under which corporations must tally up income from all of their subsidiaries before determining what portion of their profits are taxable in the state.
Vermont became the first state in more than two decades to adopt combined reporting, according to Michael Mazerov, a tax policy expert with the Center on Budget and Policy Priorities. He hopes Vermont’s action will spur other states to follow suit. Bills were introduced in about half a dozen states this year.
- To learn more and to find out if this loophole exists in your state, see the New Rules Project’s Combined Reporting page