COMMISSION TO STUDY
SINGLE-SALES FACTOR APPORTIONMENT
This
report concerns “formula apportionment,” the method used by Maine and other
states to divide up the taxable income of business entities that operate in more
than one jurisdiction. Formula
apportionment is an imperfect but necessary method for representing the
income-producing activities of a multistate business in any given state.
The statutory apportionment formula used in Maine contains 3 measures or
factors -- payroll, property and sales -- to calculate the portion of the income
of a multistate business that will be subjected to Maine income tax.
Since 1991, Maine has “double-weighted” the sales factor, which means
that a business’ sales factor is weighted at 50%, while its payroll and
property factors are weighted at 25% each.
Some version of the 3-factor formula is used by a majority of states that
impose a corporate income tax. The
particular method considered by this study is one that uses only one measure or
factor, namely sales, to determine the tax base.
This method is sometimes referred to as “single-sales factor
apportionment.”
The
impetus for this study was the introduction of a bill during the 1st
Regular Session of the 119th Legislature and the complexity of this
subject. The Joint Standing
Committee on Taxation decided to carry over the bill to the 2nd
Regular Session and proposed this study. A
Joint Order (see Appendix A) was adopted to create the 11-member special
commission, the Commission to Study Single-sales Factor Apportionment.
The Commission consisted of legislators from the Joint Standing Committee
on Taxation and the Joint Standing Committee on Business and Economic
Development, representatives from Maine Revenue Services and the Department of
Economic Community Development and two members of the public (see Appendix B for
listing of Commission members). The
Commission was charged with making a recommendation to the Joint Standing
Committee on Taxation on advisability of adopting single-sales factor corporate
income tax apportionment, a method used by states to determine how much of the
income of a business operating in more than one state is subject to taxation in
each state. The Commission met 4
times; the first meeting convened on September 8, 1999 and the last meeting was
on December 1, 1999. The Commission
analyzed several studies and literature related to the implementation of this
method of apportionment in several other states, reviewed research conducted by
Maine Revenue Services, Maine’s State Planning Office and Mr. Dan Bucks,
Executive Director of the Multistate Tax Commission and analyzed the trends and
current methods of formula apportionment for multistate businesses.
The following reasons were offered for adopting single-sales factor
apportionment:
According
to several studies and modeling conducted by the State Planning Office,
single-sales factor apportionment has the potential to be an effective
economic development incentive, reducing a disincentive to increasing
investments in a property and payroll in Maine;
The industries that were the greatest net beneficiaries from the implementation of single-sales factor apportionment in Maine are many of the same industries targeted for economic growth by Maine’s economic development strategic plan (i.e. technology industries, financial services, natural resource based industries, paper industry);
Implementing
single-sales factor apportionment shifts tax liability from multistate
businesses with substantial investments in property and payroll relative to
Maine sales to multistate businesses whose relative weighting of the sales
factor exceeds their investments in Maine (as measured by the property and
payroll factors); and
If
other states continue to adopt single-sales factor apportionment either for
all industries or for certain targeted industries, Maine will be placed at a
competitive disadvantage with respect to those states when it tries to
attract new investments to Maine.
The following reasons were offered for retaining the current formula:
A
3-factor formula using payroll, property and sales has been held out as the
most equitable method of determining the income producing capability of a
business in a particular state and the benefits derived from that state;
Although
determined by the United States Supreme Court in 1978 to be constitutional,
single-sales factor apportionment discriminates against certain businesses,
those predominantly based out-of state;
Single-sales
factor apportionment, if mandatory, will produce “winners” and
“losers” in terms of changes in Maine tax liability with those
experiencing an increase in their Maine tax liability out numbering the
“winners” by almost a 2 to 1 margin; and
With
the uncertain effect of the “throwback” rule, which adds back certain
out-of-state sales and federal government sales to the Maine sales factor, a
predominantly Maine based company might actually experience a tax increase
by the implementation of single-sales factor apportionment.
Recommendations of the Commission
The
Commission to Study Single-sales Factor Apportionment was unable to agree on a
unanimous recommendation on the adoption of the single-sales factor
apportionment. However, all but 2
members of the Commission felt that Maine should adopt a single-sales factor
apportionment method on either a limited or an optional basis.
The Commission members were divided among the following recommendations:
1. Adopt single-sales factor apportionment but:
a.
Limit this formula to manufacturing, financial services and “technology”
industries only (6 of 11 members); or
b. Permit the taxpayer to elect the single-sales formula or the current
double-weighted sales formula (3 of 11 members); and
2. Do not change the apportionment method, but instead, reduce the
corporate tax rate and eliminate corporate income tax brackets (2 of 11
members).
The
industry-specific implementation reduces the estimated revenue loss associated
with this tax change. Those members
that favored the industry-specific approach also felt this “economic
development” incentive could be more effectively aligned with Maine’s
economic development strategic plan. Those
members also felt that it was important to try to stop the erosion in Maine’s
manufacturing base.
Those
that favored an elective or optional single-sales factor apportionment method
did so to minimize the discriminatory impact of this tax change on certain
businesses. However, this version of single-sales factor apportionment
significantly increased the revenue loss to Maine.
The
members against changing Maine’s apportionment formula felt that the “tax
fairness” arguments weighed out over the estimated economic effects and that a
more equitable means of providing a tax incentive to businesses was to reduce
Maine’s corporate income tax rate and eliminate the brackets.
3. Recommend that Maine Revenue Services collect information about the
sales affected by the “throwback” rule on the corporate income tax form.
(Unanimous Recommendation)
For a copy of the complete report, please
contact Grant Pennoyer
at the Office of Fiscal and Program Review (207) 287-1635.