November 2011

David C. Morganelli, Esq.

Ryan W. Sawyer, Esq.

Pursuant to a Public Notice of Proposed Rule-Making by the Rhode Island Division of Taxation, the State of Rhode Island has proposed to alter the financial reporting requirements of corporations by compelling members of a unitary business to report their combined income.  This new filing requirement would apply to the 2011 and 2012 tax years, but would not actually result in the payment of any additional taxes.  Instead, the Division of Taxation will compile the data and submit a report detailing the potential effects of adopting combined reporting on a permanent basis.

In recent years, as budget deficits have increased at the municipal, state and federal levels, some states have decided to reconsider their tax policies and revise the way that larger companies and some retailers pay income tax.  Twenty-two states, including Massachusetts, New York, and New Hampshire have adopted what is referred to as “combined reporting.”  The general purpose of combined reporting is to capture tax revenue for the state that is derived from the unitary group’s sales, payroll, and property within the state.

Under the proposed Rhode Island statute, the “unitary business” will be defined to apply “to the broadest extent permitted under the United States Constitution” and will include companies that are directly or indirectly owned by a common owner with 50% or greater voting control. However, the unitary group will not apply to all business entities.   Examples of entities that will not be required to file reports include: S corporations, partnerships, disregarded entities, state and national banks, credit unions, and insurance companies. 

To determine the total taxable income in Rhode Island, each unitary member must determine its weighted apportionment factor by separately evaluating that entity’s sales, payroll, and property both inside and outside of the state.  Two alternative methods for determining the apportionment factor are used in combined reporting, also referred to as “Joyce” and “Finnigan” methodologies (so named for the respective cases decided in California), and under which apportionment factors may differ depending on the nexus, or physical/economic connection, a company has with Rhode Island, and depending on the industry within which it operates.

In accordance with the proposed legislation, Rhode Island will require all unitary businesses to calculate the apportionment factor using both the Joyce and Finnigan approaches during the two-year trial.  Failure to comply with the reporting requirements or filing a false report shall subject each member of a unitary group to a fine of up to $10,000.

Currently, the proposed regulation is open for public comment and any oral or written comments may be directed to the Rhode Island Division of Taxation. At the conclusion of the comment period a public hearing will be held on November 29, 2011 at 10:00 a.m. at the Rhode Island Division of Taxation, One Capitol Hill, Providence, Rhode Island.