The difference between combined reporting and separate entity accounting only arises when the unitary business is conducted by more than one separate legal entity. The difference is how a state limits the types of unitary entities whose income and factors will be included in the taxpayer’s apportionment calculation.
A state may not constitutionally require the taxpayer to include in its apportionment calculation the income and factors of any entities that are not engaged in the unitary business. In essence, a combined report is an apportionment schedule used to calculate the share of the income arising from a particular unitary business that is attributable to the taxing state.
Trend
Seven states have adopted combined reporting since 2004. Prior to 2004, no state had adopted combined reporting for two decades. The states of Vermont (2004), Ohio (2005), Texas (2006), West Virginia, New York and Michigan (2007), Massachusetts (2008), and Wisconsin (2009) have recently adopted this method. Michigan, Ohio and Texas, have adopted some form of mandatory unitary combined reporting recently, but all are in the context of gross receipts or hybrid business taxes.
Impact
If we look to the most developed state for combined reporting, namely California, this transition from separate accounting to combined reporting may be a difficult one for the state as well as the taxpayer. Now is a great time for the taxpayer doing business in these transition states to review combinable entities and groups, both foreign and domestic, as well as the methods for apportioning such unitary income. Using a company’s existing combined groups from other states without a hard scrub of a state by state review of facts and law may lead to over payment of tax or non utilization tax benefits. |