Sources of Revenue:

General Fund

Legislation creates:

Neither Program nor Fund

Fiscal Note Summary

Effect this measure will have on costs and revenues of state government.

The apparent purpose of this bill is to require that, for purposes of the Corporation Net Income Tax, taxpayers file a combined return. As written, the bill defines the term “unitary business” to mean one or more related business organizations among which there exists a unity of ownership, operation, and use or an interdependence in their functions. And, the bill revises the definition of West Virginia taxable income, for purposes of the Corporation Net Income Tax, with a proviso that for corporations that are engaged in a “unitary business” West Virginia taxable income is the allocable share of the combined net income of the group. According to our interpretation and based upon the experience of other states that have implemented “combined reporting,” we expect an increase in tax revenue for the General Revenue Fund of between $24 million and $28 million per year. Additional administrative costs to the State Tax department associated with this bill would be roughly $90,000 in the first year and roughly $50,000 per year each year thereafter.

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2007 Increase/Decrease (use"-")	2008 Increase/Decrease (use"-")	Fiscal Year (Upon Full Implementation)
1. Estmated Total Cost	0	90,000	50,000
Personal Services	0	50,000	50,000
Current Expenses	0	10,000	0
Repairs and Alterations	0	0	0
Assets	0	30,000	0
Other	0	0	0
2. Estimated Total Revenues	0	28,000,000	24,300,000

Explanation of above estimates (including long-range effect):

Passage of this bill would require that, for purposes of the Corporation Net Income Tax, taxpayers to file a combined return. The bill defines the term “unitary business” to mean one or more related business organizations among which there exists a unity of ownership, operation, and use or an interdependence in their functions. And, the bill revises the definition of West Virginia taxable income, for purposes of the Corporation Net Income Tax, with a proviso that for corporations that are engaged in a “unitary business” West Virginia taxable income is the allocable share of the combined net income of the group. According to our interpretation and based upon the experience of other states that have implemented “combined reporting,” we expect an increase in tax revenue for the General Revenue Fund of between $24 million and $28 million per year. Additional administrative costs to the State Tax department associated with this bill would be roughly $90,000 in the first year and roughly $50,000 per year each year thereafter. The additional costs would provide for the hiring of two additional auditors to assist in the review of the complicated tax returns expected due to passage of this bill.

Memorandum

The apparent purpose of this bill is to require that, for purposes of the Corporation Net Income Tax, taxpayers file a combined return. The bill, as written, amended the definition of “business income” to include “all income that is apportionable under the Constitution of the United States.” However, all other forms of income were eliminated from the definition. Also, the Constitution does not state what income is apportionable. Thus, the proposed revision may be problematic. While the bill amends the definition of “corporation” to provide a discussion of “affiliated group,” there appears to be no corresponding language (in W. Va. Code §11-24-4) to subject an “affiliated group” to the Corporation Net Income Tax. The bill also proposes a revision to the definition of “West Virginia taxable income.” However, while revising the bill to clarify the “West Virginia taxable income” for a corporation that is a member of an affiliated group, the bill may have inadvertently eliminated the inclusion in “West Virginia taxable income” apportioned or allocated income of a business that is not a member of an affiliated group but does have income business activity that is taxable outside of West Virginia. The amendments to W. Va. Code §11-24-7 require a corporation that is part of an affiliated group engaged in a unitary business to file a group return containing the combined net income of the group. However, existing language in W. Va. Code §11-24-13a which allows an affiliated group to file on a consolidated basis was not amended. Thus, the existing language may be contrary to the apparent purpose of the bill.

Person submitting Fiscal Note: Mark Muchow
Email Address: kpetry@tax.state.wv.us