State lawmakers continue to whittle away at the Department of Revenue’s authority to collect tens of millions in corporate income taxes.
The law allows the state to calculate tax debt by forcing companies to combine all of their revenue, not just the revenue received in North Carolina. It’s meant to stop corporations from shifting money into tax shelters through complex subsidiary structures.
In 2009, the state Court of Appeals ruled that Wal-Mart Stores Inc. had avoided corporate income taxes by using out-of-state subsidiaries. The court said the state had the authority to force the company to combine the subsidiaries in a single tax return.
The Department of Revenue stepped up its collection efforts in the second half of that year and recovered more than $400 million in back taxes from more than 200 corporations. Current estimates of taxes that could be collected by combined reporting have ranged from $32 million to $97 million a year.
Last year in the final days of the General Assembly’s session, legislators rewrote the law to allow corporations to defend using subsidiaries if they could prove there was a “reasonable business purpose” other than to lower taxes.
The N.C. Chamber of Commerce, which represents business interests, has closely followed the issue, and in January wrote to three Republicans on a study committee saying “significant problems remain” with the way the Revenue Department was interpreting the new law. Among other concerns, the chamber and two other business groups urged the department be required to follow a formal rule-making process rather than simply issuing its own directives.
As a result, a bill the Senate approved Thursday would prevent the Department of Revenue from issuing directives on how the law should be implemented, as it has done since 1955. Instead, the department would have to develop rules that would be subject to challenge and could be taken before an administrative law judge.
Sen. Bob Rucho, a Charlotte Republican who is one of the bill’s sponsors, said Thursday the proposal “just allows people to have a say.”
Proponents say the revision also will give corporations more certainty about tax laws, and provide a review independent of the Department of Revenue to make sure it hasn’t exceeded its authority.
The bill goes next to the House, where last year’s legislation was met with hostility from Democrats. Rep. Jennifer Weiss, a Cary Democrat, called it legalized tax evasion.
In a later interview, Weiss said the bill was unfair and represented a reversal in policy.
“North Carolina over the last 10-plus years has been working to crack down on(tax) avoidance strategies,” Weiss said. “The average person pays a fair share. Companies are hiring savvy accountants and tax lawyers to work the system.”