Fluent Essays

The purpose of this assignment is to assess state taxation and the concept of apportionment. You will prepare a memo (750-1,000 words) for a client who is considering expanding business in multiple states. XYZ Corporation is your client and you regularly communicate with the CFO, Danny Client. XYZ Corporation is a calendar year taxpayer that manufacturers equipment for businesses in Arizona, Kansas, and Oklahoma. XYZ has manufacturing facilities in Arizona and Oklahoma. There are various employees who reside and work in Kansas. The company headquarters are located in Arizona. A number of employees based in Arizona travel to Colorado and Utah to solicit sales from potential customers. After products are delivered to customers in Colorado and Utah, XYZ sends employees to install the products and conduct training. XYZ generates $100,200,000 of total revenue for all of its locations. In the memo, address the following: Summarize the client facts. Use your own words. Determine the client issues: Does XYZ have income tax nexus in Colorado and Utah? Provide advisory services by explaining the concept of nexus to the CFO, Danny Client, using the information from Public Law 86-272. Summarize the apportionment and allocations that would apply to XYZ if the company is required to file tax returns in Colorado and Utah. Describe the apportionment items and details on how the apportionment is calculated for both states. Provide the CFO with details of the potential tax and financial impact to XYZ Corporation for conducting business in multiple states. While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center. This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion. You are required to submit this assignment to LopesWrite. Refer to the LopesWrite Technical Support articles for assistance.  Benchmark Information This benchmark assignment assesses the following programmatic competencies: MS Accounting 3.2: Demonstrate the skills required to apply that knowledge in providing tax preparation and advisory services and performing other responsibilities as certified public accountants. JOURNAL OF PASSTHROUGH ENTITIES 21 January–February 2014 State Law & State Taxation Corner By John A. Biek New York and Illinois High Courts Take Divergent Views of the Constitutionality of State “Click-Through Nexus” Laws John A. Biek is a Partner in the Tax Prac- tice Group of Neal, Gerber & Eisenberg LLP in Chicago, Illinois. Introduction One of these columns from the spring of 20111 discussed two New York lower court decisions in Amazon.com, LLC v. New York State Department of Taxation and Finance that turned back facial Commerce Clause challenges to the New York “Amazon Law” or “click-through nexus” law.2 First enacted by New York in 2008, and subsequently adopted by another dozen states, these laws create a rebuttable presumption that an out-of-state re- mote seller is required to collect the state’s use tax on its interstate sales transactions with customers in the state if (1) the remote seller has contractual arrangements with in-state persons (referred to in the industry as “Internet affi liates”) to refer cus- tomers through a computer link from the Internet affi liate’s website to the remote seller’s website, (2) the remote seller is paying the Internet affi liate compensation based on the amount of sales rev- enue that the remote seller generates from these referrals and (3) the remote seller generates more than $10,000 of sales annually from such referrals from Internet affi liates.3 The theory of these click- through nexus laws is that these performance-based website referral arrangements are probably ac- companied by in-state physical sales solicitation activity by the Internet affi liate, which would give the remote seller use tax-collection nexus under well-established case law.4 Litigation is seldom a speedy endeavor and, in March 2013, some four years after the original New York Amazon.com decision, the New York Court of Appeals—the highest court in the state—affi rmed the Read "State Law and State Taxation Corner," by Biek, from Journal of Passthrough Entities (2014). URL: https://lopes.idm.oclc.org/login?url=http://search.ebscohost.com.lopes.idm.oclc.org/login.aspxdirect=true&db=bth&AN=93744292&site=ehost-live&scope=site 22 ©2014 CCH Incorporated. All Rights Reserved. constitutionality of the New York click-through nexus law.5 On December 2, 2013, the U.S. Supreme Court declined to review this ruling. Meanwhile, the Illinois Supreme Court issued a somewhat surprising ruling on October 18, 2013, in Performance Marketing Association v. Hamer,6 upholding the circuit court’s determination in May 2012 that the Illinois click-through nexus law is preempted by the federal Internet Tax Freedom Act (the “ITFA”).7 The Amazon.com and Performance Marketing Association decisions are not necessarily in confl ict because of differences in the language of the New York and Illinois click-through nexus statutes and the legal theories on which these two cases were decided. Signifi cantly, the Illinois click- through nexus law conclusively presumes that the remote seller has estab- lished nexus in Illinois as a result of its contractual arrangements with in- state Internet affi liates to pay performance-based compensation for their website referrals to the remote seller’s website, whereas the New York click-through nexus only creates a rebuttable presumption of nexus that the remote seller can overcome by demonstrating that its instate Inter- net affi liates have not engaged in actual physical solicitation activity on behalf of the remote seller in New York. Moreover, the Illinois Supreme Court did not address the Commerce Clause argument in the Performance Marketing Association case, basing its decision solely on the ITFA. This appears to be the fi rst case fi nding a state tax to be preempted by that federal statute. It is not really surprising that the U.S. Supreme Court denied a writ of certiorari in the New York Amazon.com and Overstock.com cases because of the absence of a confl ict between the New York and Illinois high court decisions and the fact that the New York courts only decided the facial Commerce Clause challenges to the New York click-through nexus law. The New York Department of Taxation and Finance is not asserting nexus against remote sellers that do not allow their New York-based Internet affi liates to engage in sales solicitation activity on behalf of the remote seller in New York. Nevertheless, these New York and Illinois court decisions have further mud- died the constitutional waters of state click-through nexus laws. The New York Click-Through Nexus Law The New York click-through nexus stemmed from concerns in 2008 that online merchants like Amazon. com and Overstock.com were utilizing third-party retail stores in New York and the websites of New York-based youth sports clubs, schools, religious institutions and other so-called “Internet affi liates” with local audiences in the state to cross market the online merchant’s products. The online merchant would enter into a contract providing for the Inter- net affi liate to create and promote a computer link from its website to the on-line merchant’s website in return for performance-based commissions based on the volume of sales transactions that the online mer- chant was able to make as a result of these referrals of the Internet affi liate’s audience to the online merchant’s website. On April 28, 2008, the N e w Yo r k A s s e m b l y amended the definition of “vendor” in the New York sales/use tax laws to add the following Section 1101(b)(8)(vi): a person making sales of tangible personal property or services taxable under this article (“Seller”) shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state un- der which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ending on the last day of February, May, August and November. This presumption may be rebutted by proof that the resident with whom the seller has an agree- ment did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States Constitution during the four quarterly periods in question.8 State Law & State Taxation Corner Nevertheless, these New York and Illinois court decisions have further muddied the constitutional waters of state click-through nexus laws. JOURNAL OF PASSTHROUGH ENTITIES 23 January–February 2014 Crafting the New York click-through nexus law as a rebuttable presumption that the in-state Internet affi liates were acting as sales representatives of the remote seller proved to be clever because it allowed the New York courts to uphold the constitutionality of the statute. Indeed, within two weeks of the fi ling of Amazon’s declaratory judgment action alleging that the New York click-through nexus law was unconstitutionally imposing a use tax collection ob- ligation on out-of-state vendors without any physical presence in New York, contrary to the holding of the U.S. Supreme Court in Quill Corp. v. North Dakota,9 the New York Department of Taxation and Finance clarifi ed the scope of the New York click-through nexus law in Technical Services Bureau Memoran- dum TSB-M-08(3)S.10 This document explained, fi rst, that the rebuttable presumption of nexus in Section 1001(b)(8)(vi) would be triggered only by the pay- ment of commission-based fee compensation to the New York-based Internet affi liate, as opposed to a fl at-fee advertising arrangement that did not take into account the dollar amount of sales that the Internet affi liate’s referral activities were generating for the remote seller. TSB-M-08(3)S went on to explain that “[f]or pur- poses of administering the new presumption, the Tax Department will deem the presumption rebut- ted where the seller is able to establish that the only activity of its resident representatives in New York State on behalf of the seller is a link provided on the representatives’ Web sites to the seller’s Web site and none of the resident representatives engage in any solicitation activity in the state targeted at potential New York State customers on behalf of the seller.” Indeed, Example 6 in TSB-M-08(3)S described a fact pattern in which several New York ski clubs that main- tained links to remote seller XYZ’s website were paid commissions based on the amount of sales resulting from those links, but none of the ski clubs referred potential customers to XYZ through the distribution of fl yers, newsletters, telephone calls or emails to club members or any other means of in-state solicitation targeted at potential New York customers on behalf of XYZ. Under those circumstances, TSB-M-08(3)S con- cluded, XYZ had successfully rebutted the statutory presumption that XYZ had established use tax collec- tion nexus in New York as a result of its performance marketing arrangement with the in-state ski clubs. On June 30, 2008, the Department issued a second Technical Services Bureau Memorandum, TSB-M-08(3.1)S, explaining that a remote seller could avoid the presumption of nexus under Sec- tion 1101(b)(8)(vi) if (1) the remote seller included a provision in its business referral agreements with Internet affi liates prohibiting them from “engaging in any solicitation activities in New York State that refer potential customers to the seller” and (2) the remote seller obtained annual signed certifi cations from the Internet affi liates that they had not actually engaged in such solicitation activities in New York during the previous year.11 On January 12, 2009, Judge Eileen Bransten of the Supreme Court for New York County (the trial court) granted the department’s motion to dismiss all of the counts in Amazon’s complaint for failure to state a claim. Judge Bransten rejected Amazon’s claim that the New York click-through nexus law is facially in- valid under the Commerce Clause, concluding that: The statute is targeted at requiring tax collection when an out-of-state seller avails itself of the benefi t of in-state contractors compensated for referrals. As an added safeguard the Commis- sion-Agreement Provision makes plain that a seller does not have to collect taxes so long as its New York contractors “did not engage in any solicitation in the state [on its behalf] that would satisfy the nexus requirement of the United States Constitution.” Thus, a seller is afforded the op- portunity to prove that none of its contractors actively sought sales on its behalf in New York.12 Judge Bransten was not persuaded by Amazon’s argument that the New York click-through nexus law creates nexus out of “simple advertising by in-state advertisers.” Rather, Judge Bransten found that the New York statute “imposes a tax-collection obligation on sellers who contractually agree to compensate New York residents for business that they generate and not simply for publicity.”13 Judge Bransten believed that what was really happening under these performance marketing arrangements was that “Amazon chooses to benefi t from New York Associates that are free to target New Yorkers and encourage Amazon sales, all the while earning money for Amazon in return for which Amazon pays them commissions. Amazon does not discourage its Associates from reaching out to customers or con- tributors and pressing Amazon sales.”14 Judge Bransten determined that the New York click-through nexus law would not violate the Com- merce Clause as applied to Amazon, either, even if 24 ©2014 CCH Incorporated. All Rights Reserved. Amazon could show that its Internet affi liates were not soliciting business in New York at Amazon’s di- rection or behest. In Judge Bransten’s view, because Amazon gave its Internet affi liates an economic incentive to engage in local solicitation activity on behalf of Amazon, that solicitation activity was prob- ably occurring on behalf of Amazon.15 Indeed, Judge Bransten observed, Amazon had made no allegation in its complaint that its in-state Internet affi liates were not physically soliciting sales orders from New York customers for Amazon in New York.16 For similar reasons, Judge Bransten dismissed all of the claims in Overstock’s complaint.17 On November 4, 2010, the Supreme Court, Appel- late Division, affi rmed Judge Bransten’s conclusion that the New York click- through nexus law does not facially violate the Commerce Clause. The three-judge Appellate Di- vision panel found that the New York click-through nexus law “imposes a tax collection obligation on an out-of-state vendor only where the vendor enters into a business-referral agreement with a New York resident, and only when that resident receives a commission based on a sale in New York.”18 The Appellate Division added: Of equal importance to the requirement that the out-of-state vendor have an in-state presence is that there must be solicitation, not passive adver- tising. While Tax Law §1101(b)(8)(vi) creates the presumption that the in-state agent will solicit, it provides the out-of-state vendor with a ready es- cape hatch or safe harbor. The vendor merely has to include in its contract with the in-state vendor a provision prohibiting the in-state representative from “engaging in any solicitation activities in New York State that refer potential customers to the seller,” and the in-state representative must provide an annual certifi cation that it has not engaged in any prohibited solicitation activi- ties as outlined in the memorandum. Thus, an in-state resident which merely acts as a conduit for linkage with the out-of-state vendor will be presumed to have not engaged in activity which would require the vendor to collect sales taxes. Presumably, there are vendors which will be able to execute the annual certifi cation without fear of making a misrepresentation.19 Indeed, the Appellate Division was not able to reconcile Amazon’s argument that its Internet af- fi liates were only engaging in passive advertising in New York with the statement in the company’s own Associates Program marketing materials that “[o]ur compensation philosophy is simple: reward Associates for their contributions to our business in unit volume and growth. Amazon is a fast growing business and we want our Associates to grow with us. . . . The performance structure allows you to earn higher fees when you generate a suffi cient volume of referrals that result in sales at Amazon.com during a month. The higher your referrals, the greater your earnings will be.”20 However, the Appel- late Division remanded the Amazon.com and Overstock.com cases to the trial court for further development of the tax- payers’ claims that the application of the New York click-through nexus law to them violated the Commerce Clause. Because no discovery had yet been undertaken regarding Amazon’s and Overstock’s referral arrangements with their in-state affi liates, the Appellate Division was unable to conclude, as a matter of law, that the in-state Internet affi liates were “engaged in suffi ciently meaningful activity so as to implicate the State’s taxing powers,” particularly “whether their in-state representatives are soliciting business or merely advertising on their behalf.”21 While this remand kept Amazon’s and Overstock’s cases alive, these vendors may not have relished the prospect of detailed discovery into their sales prac- tices in New York. Indeed, Amazon and Overstock abandoned their as-applied Commerce Clause challenges when they appealed the Appellate Division’s decision to the New York Court of Appeals. On March 28, 2013, the Court of Appeals affi rmed the conclusion of the two lower courts that the New York click-through nexus law constitutionally presumes that the remote seller’s Internet affi liates are engaging in physical solicitation activity in New York on behalf of the remote seller in order to increase the amount of performance-based compensation the affi liates receive from the remote State Law & State Taxation Corner Crafting the New York click- through nexus law as a rebuttable presumption that the in-state Internet affi liates were acting as sales representatives of the remote seller proved to be clever[.] JOURNAL OF PASSTHROUGH ENTITIES 25 January–February 2014 seller.22 The Court of Appeals noted in its opinion that “no one disputes that a substantial nexus would be lacking if New York residents were merely engaged to post passive advertisements on their websites.23 However, the Court of Appeals agreed with the De- partment’s argument that the New York click-through nexus law was targeting physical solicitation activity of the in-state Internet affi liates, which would consti- tute more than mere advertising: [T]hrough this statute, the legislature has at- tached signifi cance to the physical presence of a resident website owner. The decision to do so recognizes that, even in the Internet world, many websites are geared toward predominantly local audiences—including, for instance, radio stations, religious institutions and schools—such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affi liation agreements, a vendor is deemed to have established an in-state sales force.24 The Court of Appeals concluded that: Viewed in this manner the statute plainly satisfi es the substantial nexus requirement. Active, in-state solicitation that produces a signifi cant amount of revenue qualifi es as “demonstrably more than a ‘slightest presence’” under Orvis. Although it is not a dispositive factor, it also merits notice that vendors are not required to pay these taxes out- of-pocket. Rather, they are collecting taxes that are unquestionably due, which are exceedingly diffi cult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation.25 The Court of Appeals drew on the same rationale to reject Amazon’s and Overstock’s argument that the New York click-through nexus law facially violated the Due Process Clause by creating an irrational and essentially irrebutable presumption of nexus. Accord- ing to the Court of Appeals, “[i]t is plainly rational to presume that, given the direct correlation between referrals and compensation, it is likely that residents will seek to increase their referrals by soliciting customers, more specifi cally, it is not unreasonable to presume that affi liated website owners residing in New York State will reach out to their New York friends, relatives and other local individuals in order to accomplish their purpose.”26 Moreover, the New York click-through nexus law affords the remote seller some opportunity to rebut the presumption of nexus by contractually prohibiting affi liates to engage in physical solicitation activity in New York on behalf of the remote seller and obtaining annual certifi cates from all of the affi liates that they have not undertaken such solicitation activity. The Court of Appeals concluded that “[o]btaining the necessary information may impose a burden on the retailers, but inconvenience does not render the presumption irrebuttable,” in violation of the Due Process Clause.27 The Illinois Click-Through Nexus Law The Illinois Supreme Court took a very different tack in its review of the constitutionality of the Illinois click-through nexus law in Performance Marketing Association, Inc. v. Hamer.28 Enacted on March 10, 2011, as Public Act 96-1544, the Illinois click-through nexus provision in Section 2 of the Illinois Use Tax Law expanded the defi nition of a “retailer maintaining a place of business in this State” to include: a retailer having a contract with a person located in this State under which the person, for a com- mission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link on the person’s Internet website. The provisions of this paragraph 1.1 shall apply only if the cumulative gross receipts from sales of tangible personal property by the retailer to customers who are referred to the retailer by all persons in this State under such contracts exceed $10,000 during the preceding 4 quarterly periods ending on the last day of March, June, September, and December.29 Whereas the New York click-through nexus law establishes a rebuttable presumption that the in-state Internet affi liates are engaged in localized physical sales solicitation activity in New York on behalf of the remote seller, this Illinois click-through nexus law conclusively presumes that such nexus has been established as a result of the existence of the contrac- 26 ©2014 CCH Incorporated. All Rights Reserved. tual performance marketing arrangement between the remote seller and the Internet affi liate in Illinois. The Illinois Department of Revenue did not have much of an opportunity to develop administra- tive guidance on how it would apply the Illinois click-through nexus law because the Performance Marketing Association (the “PMA”), a nonprofit trade organization in Camarillo, California, that represents the interests of businesses, organizations and individuals using and supporting performance marketing methods, including performance mar- keting on the Internet, promptly fi led a lawsuit in the Circuit Court of Cook County challenging the constitutionality of the Illinois click-through nexus statute. The PMA’s complaint for declaratory and injunctive relief alleged that the Illinois click-through nexus law violated the Commerce Clause because the statute imposed a use tax collection obligation on remote sellers lack- ing the physical presence in Illinois required by the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota.30 The PMA’s complaint further alleged that the Illinois click-through nexus law violates the federal Internet Tax Freedom Act by affording more onerous nexus treatment to Internet-based performance marketing arrangements than performance marketing by print or broadcast methods.31 The PMA and the Department entered into a de- tailed joint stipulation of facts that described the sorts of performance marketing activity that could trigger sales and use tax nexus under the Illinois click-through nexus law. The parties stipulated that “[o]ther Internet retailers affected by P.A. 96-1544 have no physical presence in Illinois, but maintain websites offering goods and/or services to consumers throughout the country, and sell products and services to consumers in Illinois and elsewhere from facilities located outside the state, by using instrumentalities of interstate commerce, including the Internet, and also enter into contracts with Internet affi liates located in Illinois, and make sales to consumers who access their websites through links on the websites of such Illinois Internet affi liates.”32 Much of this performance marketing was directed at a regional, national or international audience on the Internet rather than specifi cally at Illinois consumers.33 The Department also stipulated that: Under P.A. 96-1544, a retailer will be included within the defi nition of a ‘retailer maintaining a place of business in this State’ if: (1) the retailer has a contract with an Internet affi liate with a physical presence in Illinois for placement of text or images on its (the Internet affi liate’s) website that include a link that connects an Internet user to the retailer’s website; (2) the Internet affi liate receives compen- sation based upon sales by the retailer to such customers; and (3) the retailer receives more than $10,000 total gross receipts in the previous four quarters from sales to customers who are referred to the retailers by Internet affi liates in Illinois. Under the amendments to 35 ILCS 105/2 and 35 ILCS 110/2 set forth in P.A. 96-1544, the retailer does not need to have a physical presence in Illinois; the retailer’s contracts with Internet affi liates alone are suffi cient.34 Thus, whereas in the Amazon.com case the New York Department of Taxation and Finance ar- gued that the rebuttable presumption of nexus in the New York click-through nexus law was justifi ed by the in-state physical solicitation activity that in-state Internet affi liates were presumably conducting on behalf of the remote seller, the Illinois Department of Revenue took the forthright position in the Per- formance Marketing Association case that the mere existence of the contractual performance marketing arrangement between the remote seller and its in- state Internet affi liate gives the remote seller nexus in Illinois. The department agreed this was the case even though “[c]onsumers generally do not know, and have no way of knowing, the physical location, including the state or even the country, where the computer servers hosting a website are located. This includes the websites of Internet affi liates and retailers engaged in performance marketing.”35 This was hardly the traditional face-to-face sales solicitation activity that courts have considered over the years in their cases fi nding use tax collection nexus. The PMA and the department also stipulated that performance marketing is not unique to the Internet. It is commonly used in online sales because of the ease of tracking consumer purchases and the role that a State Law & State Taxation Corner The Illinois Supreme Court’s opinion in the Performance Marketing Association cases leaves a hollow feeling for many state tax practitioners and taxpayers. JOURNAL OF PASSTHROUGH ENTITIES 27 January–February 2014 link from an Internet affi liate’s website to the remote seller’s website played in generating that sale.36 How- ever, the parties agreed that “[o]ffl ine, performance marketing is often used where some other method permits the retailer to track the promotion and deter- mine the level of response to and/or sales resulting from the promotion. Examples would be the use of promotional codes in print and on radio.”37 On May 7, 2012, the Circuit Court of Cook County issued a brief order granting summary judgment to the PMA on both its facial Commerce Clause claim and its Internet Tax Freedom Act claim.38 The Illinois Department of Revenue was able to appeal the Circuit Court’s decision directly to the Illinois Supreme Court because the decision had invalidated the Illinois click-through nexus law on constitutional grounds. The Illinois Supreme Court surprised many observ- ers when it punted on the Commerce Clause issue and instead affi rmed that the Illinois click-through nexus law is federally preempted by the ITFA.39 En- acted by Congress in 1998, section 1101(a)(2) of the ITFA prohibits a state from imposing “discriminatory taxes on electronic commerce.”40 Section 1104(2) (A)(iii) of the ITFA defi nes a “discriminatory tax” in part as any tax “imposed by a State or political subdivision thereof on electronic commerce that . . . imposes an obligation to collect or pay the tax on a different person or entity than in the case of transac- tions involving similar property, goods, services, or information accomplished through other means.”41 The PMA claimed that the Illinois click-through nexus law presents such a federally preempted dis- criminatory tax on electronic commerce because the express language of the Illinois click-through nexus law only describes performance compensated sales referrals via a computer link from the Internet affi liate’s website to the remote seller’s website. Per- formance marketing via more traditional media such as catalogs, magazines, newspapers, television and radio were not, according to the PMA, covered by the Illinois click-through nexus law. The Department responded that another provision of the “retailer maintaining a place of business in this State” defi ni- tion in Section 2 of the Illinois Use Tax Act applies to a “retailer, pursuant to a contract with a broad- caster or … State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data Xavier Giroud Columbia University, National Bureau of Economic Research, and Centre for Economic Policy Research Joshua Rauh Stanford University, Hoover Institution, Stanford Institute for Economic Policy Research, and National Bureau of Economic Research Using census microdata on multistate firms and their organizational forms, we estimate the impact of state taxes on business activity. For C corporations, employment and the number of establishments have short-run corporate tax elasticities of 20.4 to 20.5 and do not vary with changes in personal tax rates. Pass-through entity activities show tax elasticities of 20.2 to 20.4 with respect to personal tax rates and are in- variant with respect to corporate tax rates. Capital shows similar pat- terns. Reallocation of productive resources to other states drives around half the effect. The responses are strongest for firms in tradable and footloose industries. The impact of state business taxation on employment and capital has been heavily debated in both academic and policy circles on both theo- retical and empirical grounds. The public finance literature has long rec- ognized that business taxation affects marginal incentives through effec- We are grateful to Erik Hurst (the editor), four anonymous referees, Jeffrey Brown, Steve Davis, William Gale, Austan Goolsbee, Jim Hines, Charles McLure, David Merriman, Holger Mueller, Mitchell Petersen, James Poterba, Juan-Carlos Suarez Serrato, Amit Seru, Danny Electronically published April 9, 2019 [ Journal of Political Economy, 2019, vol. 127, no. 3] © 2019 by The University of Chicago. All rights reserved. 0022-3808/2019/12703-0007$10.00 1262 “State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data,” by Giroud, from Journal of Political Economy (2019). URL: https://lopes.idm.oclc.org/login?url=https://search.ebscohost.com/ login.aspx?direct=true&db=bth&AN=136771118&site=eds- live&scope=site&custid=s8333196&groupid=main&profile=103280 tive marginal tax rates and the cost of capital (Hall and Jorgenson 1967; Fullerton 1984). More recent literature shows that taxation can have a strengthened impact on the discrete choice of business location through the impact of average tax rates and overall profitability, particularly in the presence of economic rents (Devereux and Griffith 2003; Auerbach 2006). On the other hand, increased business taxation might not have a large effect on the level of hiring and investment if businesses can change their activities to use more tax-favored production strategies or organiza- tional forms or if tax revenues are spent on public goods that improve the state’s business climate.1 An empirical literature starting with Carlton (1979, 1983) and Bartik (1985), and surveyed in Bartik (1991), has studied the geographic loca- tion decisions of new firms or establishments as a function of state tax and other characteristics.2 Studies beginning with Helms (1985) and Wasy- lenkoandMcGuire(1985),andmorerecentlyGale,Krupkin,andRueben (2015) and Suarez Serrato and Zidar (2016), have used aggregated panel data at the state, county, or industry level to examine the effect of state and local taxes on economic growth, employment, or capital formation.3 And a rich literature has modeled the tax implications of firms’ choices of whether to enter foreign markets, notably Devereux and Griffith (1998, 1 For example, Fajgelbaum et al. (2019) estimate firm and worker mobility and prefer- ences for public services jointly in a spatial model. 2 Other papers taking various approaches to measuring the effect of tax policy on the location of new plants or firms include Coughlin, Terza, and Arromdee (1991), Papke (1991), Wasylenko (1991), Hines (1996), Guimaraes, Figueiredo, and Woodward (2003, 2004), Gabe and Bell (2004), Rathelot and Sillard (2008), and Brüllhart, Jametti, and Schmidheiny (2012). 3 Earlier papers focusing on one municipal or geographic area include Grieson et al. (1977) and Grieson (1980) on the New York City and Philadelphia income taxes, respec- tively. Fox (1981) examines Cuyahoga County, Ohio, and Newman (1983) focuses on the South. Papers following on the panel approach of Helms (1985) using aggregated panel data include Papke (1987), Mofidi and Stone (1990), Goolsbee and Maydew (2000), Bania, Gray, and Stone (2007), Reed (2008), Gale et al. (2015), and Suarez Serrato and Zidar (2016). Moretti and Wilson (2017) use patent office data on the location of investors to show that changes in state personal and corporate taxation have an effect on the geograph- ical location of innovative activity. Yagan, Owen Zidar, and Eric Zwick for helpful discussions and comments, and to seminar participants at Chicago, Stanford, Massachusetts Institute of Technology, Columbia, Whar- ton,NewYorkUniversity,Yale,UniversityofCaliforniaLosAngeles,London Business School, London School of Economics, Utah, Toronto, Tilburg, Erasmus, Bocconi, Lausanne, Lux- emburg, the London Business School Causality Conference, the NBER Public Economics meetings (fall 2015), the NBER Corporate Economics meetings (fall 2015), the 2015 Na- tional Tax Association meetings, the 2016 American Economic Association meetings, the 2016 Texas Finance Festival, the 2016 Minnesota Corporate Finance Conference, and the 2016 Barcelona Graduate School of Economics Summer Forum. We thank David Colino, Bryan Chang, and Young Soo Jang for research assistance. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the US Census Bureau. All results have been reviewed to ensure that no confidential infor- mation is disclosed. Data sources and coding information are provided as supplementary material online. state taxation and the reallocation of business activity 1263 2003); see also Grubert and Mutti (2000), Devereux, Griffith, and Simpson (2007), Devereux, Lockwood, and Redoano (2008), and Duranton, Go- billon, and Overman (2011). This line of work has faced two main challenges. First, tax policy is not exogenously determined, so that ascribing a causal interpretation to cor- relations between state tax changes and counts of businesses or employ- ees has been problematic. The primary concern is that state governments might change tax policy in anticipation of changing economic conditions. In one approach to address this issue, Fox (1986), Holmes (1998), Hol- combe and Lacombe (2004), and Ljungqvist and Smolyansky (2016) use county-level data to study how state taxation affects business activity in bor- der counties between states that change policies and those that do not. The second challenge is that the studies have lacked comprehensive mi- crodata at the establishment level, so that the decisions of individual busi- nesses cannot be tracked over time, leaving uncertainty as to whether firms are relocating their businesses to other regions or reducing the scale of their operations. This study uses comprehensive and disaggregated establishment-level data from the US Census Bureau to examine the impact of state business taxation on employment and capital. We focus on firms with establish- ments in multiple states, which must set their organizational form at the federal level to be applicable to all establishments. To measure an effect of state tax policy on business activity, we begin by exploiting the fact that the corporate tax code directly affects only firms organized as subchap- ter C corporations, whereas firms organized as S corporations, partner- ships, or sole proprietorships (so-called pass-through entities) are directly affected only by the individual tax code and other business taxes.4 Our ap- proach is therefore closely related to that of Yagan (2015), who investi- gates the impact of dividend taxes using the distinction between S corpo- rations and C corporations.5 Our study is unique in that we use fully disaggregated data at the firm and establishment levels and distinguish between firms of different orga- nizational form for tax purposes. This setting allows for separate mea- surement of the effects of the corporate tax code on the activities of C cor- 4 Cooper et al. (2015) document that pass-through entities currently generate more than half of US business income, having risen from much lower levels in the 1980s. Goolsbee (2004) examines how firms adjust their organizational form with respect to state taxes at the corporate level, an adjustment margin that we also consider in our data. Since our sample firms all operate in multiple states, however, it is not surprising that we observe quite little leakage out of the corporate sector for these firms as a result of state-level tax policy. 5 Yagan (2015) uses the distinction between C corporations and S corporations to test whether the 2003 dividend tax cut affected corporate investment, as only C corporations are subject to the double taxation created by the taxes on capital income. 1264 journal of political economy porations and of the effects of the personal tax code on the activities of pass-through entities, as well as tests for cross-effects. Furthermore, the establishment-level microdata allow us to disentangle reallocation versus pure economic disincentives of taxation. Our primary sample consists of all US establishments from 1977–2011 belonging to firms with at least 100 employees and having operations in at least two states. On the extensive margin, we find that a 1 percentage point increase (decrease) in the state corporate tax rate leads to the clos- ing (opening) of 0.04 establishments belonging to firms organized as C corporations in the state. This corresponds to an average change in the number of establishments per C corporation of 0.5 percent. A similar analysis shows that a 1 percentage point change in the state personal tax rate affects the number of establishments in the state per pass-through entity by 0.4 percent. The cross-correlations between pass-through activ- ity and corporate tax rates, and between corporate activity and personal tax rates, are zero. On the intensive margin of number of employees per establishment, we find very similar results. Furthermore, we find that the marginal effec- tive tax rate (in the sense of Fullerton [1984]) has a larger point estimate effect than the statutory rate on the intensive margin, consistent with the predictions of Devereux and Griffith (1998, 2003).6 Focusing on manu- facturing firms, we find that capital shows directional patterns similar to labor in its response to taxation. The point estimates of the elasticities are 31–35 percent smaller for capital, although the standard errors are not large enough to reject the null hypothesis that the magnitude is the same as the effect on labor. Opposite effects of around half of these magnitudes are observed in re- sponse to tax changes in the other states in which firms operate, so that around half of the baseline effect is offset by reallocation of activity across states. This lends strong support to the view that tax competition across states is economically relevant and is consistent with findings by Davis and Haltiwanger (1992) that emphasize the importance in the labor mar- ket of shifts in the distribution of employment opportunities across work sites. The remaining changes in establishments and employment reflect either forgone economic activity or moving abroad. Further analysis captures complexities, heterogeneity, and changes in state tax codes regarding apportionment of income in multistate firms. If a company has a physical presence in more than one state, the company must apportion its profits according to each state’s apportionment fac- 6 The marginal effective tax rate captures differences in the impact of the statutory rate on the firm’s marginal tax burden due to differences in the present value of depreciation allowances and investment tax credits. state taxation and the reallocation of business activity 1265 tor weights for property, payroll, and sales.7 We show that the response of moving establishments, employees, and capital is greatest when the physi- cal location of a firm’s employees and property carries a larger weight in assigning the tax burden to a given state. Even when the location of sales carries a larger weight, however, we find strong effects when rules are in effect that mitigate the tax attractiveness of firms moving to high sales ap- portionment states (so-called throwback and throwout rules). We further address endogeneity concerns by adopting a narrative ap- proach in the spirit of Romer and Romer (2010), focusing on the 161 tax changes in the sample of more than 100 basis points. For changes that were passed to deal with an inherited budget deficit or to achieve a long- run goal—changes less likely to be correlated with confounding factors that can affect output and economic activity—we find magnitudes very similar to those in the full sample of establishments affected by these large cuts. Around half of the effects are felt in the tax year in which the tax rate changed, with the full force being felt in the following year. We further augment the narrative approach by looking separately at tax changes at the state level that occurred in response to windfalls and shocks from the federal tax reform acts of 1981 and 1986, finding effects of magnitude similar to those of the other large increases and cuts in the corporate and personal tax rates. Overall, our findings on the effects of corporate taxation are larger than those found in work that has examined the impact of tax policy at the national level, such as Mertens and Ravn (2014), which finds using narrative approaches that a 1 percentage point cut in the average corpo- rate income tax rate at the federal level raises employment by a maximum of 0.3 percent. Tax competition across states roughly doubles the base- line effects that would be found in the absence of firms’ ability to move across states. Our elasticities are significantly smaller than those of Suarez Serrato and Zidar (2016), who use a 10-year establishment elasticity of 4 estimated in reduced-form aggregated panel data to calibrate their incidence model. We demonstrate that these differences are due in part to the time horizon (we find elasticities of 1.2 using our identification strategy over 10 years), but in greater part due to the fact that our identification strategy allows us to control for state-level economic variation that may be correlated with but not caused by tax changes. When we remove fixed effects that control for composition effects and nontax reasons a given firm may choose to be active in a given state, our estimates appear much closer to those in Suarez 7 Strictly speaking, a state might have the right to tax a firm even if the firm does not have a physical presence. That is, physical presence is sufficient, but perhaps not necessary, for what is called “taxable nexus.” For example, providing installation or technical support of a product in a state can generate nexus. 1266 journal of political economy Serrato and Zidar’s study. Our results therefore imply that the actual elas- ticities for existing firms are between those implied by national-level re- gressions such as those in Mertens and Ravn (2014) and regressions on ag- gregated state-level data such as those in Suarez Serrato and Zidar (2016). This paper is organized as follows. Section I reviews the background and related literature on business taxation at the state level. Section II dis- cusses the data and methodology, specifically the establishment-level data fromtheUSCensusBureau,ourcompilationofchangesinstatetaxcodes, the specifications, and the implementation of the robustness checks us- ing the narrative approach and the changes in state tax policy induced by federal legislation. Section III details the main results on the extensive and intensive margins. Section IV provides evidence on heterogeneous treatment effects and general equilibrium. Section V presents conclusions. I. Background, Literature, and Conceptual Framework A. Business Taxation at the State Level In many respects, the structure of state business taxation, and especially the definition of income, follows the general outlines of federal tax law. The decision of a firm to incorporate allows for limited liability and cen- tralized management but opens the possibility of entity-level taxation un- der the corporate tax code at the federal level (Congressional Budget Of- fice 2012). Firms that are incorporated under subchapter C of the federal tax code (C corporations) must pay tax at corporation tax rates. Owners of these firms then pay individual taxes when they receive dividends from the C corporations or when they realize capital gains. Firms that are in- corporated under subchapter S of the federal tax code, as well as unin- corporated firms organized as partnerships and sole proprietorships, are deemed pass-through entities. Pass-through entities pay no tax at the firm level, but rather pass all profits on to their owners, who must pay taxes im- mediately on their profits. Firms can also organize as limited liability cor- porations (LLCs), a structure that offers some of the benefits of corporate organization, such as full liability protection, without necessarily being subject to entity-level taxation under the federal corporate tax code.8 Most states have a standard corporate income tax on profits that re- sembles the federal corporate income tax: taxable income is calculated 8 There are differences in the incentives that different types of firms face in choosing these different forms of organization. For example, small business owners with losses have a stronger incentive to choose pass-through taxation than corporate taxation when such an election is available (Gordon and Cullen 2006). We consider the potential effects of such heterogeneity in the analysis in several ways below. state taxation and the reallocation of business activity 1267 starting with revenues net of allowable cost deductions, and then a cor- porate tax rate is applied to the state’s apportioned share of taxable in- come.9 However, as of the end of the sample, three states had no corpo- rate income tax: Nevada, South Dakota, and Wyoming.10 Texas had no corporate income tax until 1991. Four states taxed corporations in some other way, usually a tax on gross receipts. Starting in 2005, Ohio began to phase out its corporate franchise tax and phased in a Commercial Activ- ities Tax, which applies a rate of 0.26 percent to taxable receipts of over $1 million. Michigan had a Single Business Tax based on a value-added calculation from 1975 onward. In 2008 it then began the phase-in of the Michigan Business Tax, which had a base of gross receipts less purchases, and then finally implemented a regular corporate income tax in 2012. Washington has the Business and Occupation Tax, a gross-receipts tax, during the entire sample period. Texas implemented a Corporate Fran- chise Tax in 1992, which was then replaced by the Texas Margin Tax in 2008. Further complicating the analysis of the effects of tax policy on corpo- rate activity are the laws that differ by state as to how taxable income must be apportioned for multistate firms for tax purposes. In contrast to the federal tax treatment of multinational firms, which requires transfer prices for intermediate production inputs moved by the firm across borders, states use apportionment formulas that obviate the need for keeping track of internal prices. In determining state-level tax liabilities, a firm must first determine which states have the power to tax the business or, in tax termi- nology, whether a company has “nexus” in a state. If a firm has a physical presence in the state, specifically property or employees, then the state clearly has the power to tax. If the firm does not have a physical presence in the state and its activities are limited to “mere solicitation of orders,” the state does not have the power to tax the firm.11 A firm must consider the apportionment formula for each state in which it has nexus.12 Apportionment formulas are typically a function of the location of at least one of three different measures of economic activity: sales, payroll, and property. The apportionment formula effectively changes the cor- porate income tax into a tax on each of the apportionment formula fac- tors (McLure 1980, 1981). Gordon and Wilson (1986) show how appor- 9 States are not required to follow the federal definition of income in all respects, al- though most state statutes incorporate the Uniform Division of Income for Tax Purposes Act, a model act intended to create tax uniformity. 10 Nevada, however, has a payroll tax called the Modified Business Tax. This tax is not included in the analysis. 11 The Interstate Income Act of 1959, referred to as Public Law 86-272, details conditions under which a firm might lack physical presence in a state but still have nexus in the state. 12 Some variation exists in the way states tax pass-through entities with nonresident own- ers. According to Baker Tilly (2014), more than 30 states “require pass-through entities to withhold income tax on behalf of some or all owners—generally nonresidents.” 1268 journal of political economy tionment approaches can create complex incentives both for multistate firms and for state governments setting tax policy. At the beginning of the sample period, virtually all states used an equally weighted formula, but during the sample period there was a shift toward the use of single- sales apportionment (i.e., a 100 percent weight on sales). To illustrate by way of example, California had a one-third weight on each of sales, payroll, and property until 1992. A firm with nexus in Cal- ifornia would calculate the share of sales, share of payroll, and share of property in California, and the average of these three components would yield the percentage of the firm’s taxable income apportioned to Califor- nia. From 1992 to 2010, the weights in California were 50 percent on sales, 25 percent on payroll, and 25 percent on property.13 Relative to the pre-1992 regime, firms with more sales in California but less physical pres- ence had to allow more of their income to be taxed in California. Con- versely, firms with few in-state sales but more physical presence saw a re- duction in their tax burden. These changes went even further in 2011, when California introduced an optional 100 percent weight on sales, and in 2013, when the 100 percent sales weight became mandatory. Under a pure single-sales apportionment factor, the only variable that matters in apportioning income to the state (assuming the firm has nexus) is what percentage of the firm’s sales were in the state itself. However, some states (including California) have so-called throwback rules associ- ated with their apportionment calculations, where states capture income from sales to other states by requiring companies to add (or “throw back”) sales that are made to buyers in a state where the company has no nexus, sometimes called “nowhere income.” Three states (Maine, New Jersey, and West Virginia) have a “throwout” rule instead of a “throwback” rule, which accomplishes a similar goal, namely, to increase the relative weight of in-state sales in the sales factor, thus increasing the income apportioned to the taxing state. Under throwout rules, states capture the nowhere in- come by requiring companies to subtract (or “throw out”) nowhere sales from total sales, thereby reducing the denominator in the apportionment calculation. There has been relatively little empirical work studying the impact of apportionment formulas. Using variation in the payroll weight across states and over time, Goolsbee and Maydew (2000) demonstrate that the within-state employment effect of reducing the payroll weight is, on aver- age, substantial and that such a change has a negative effect on employ- ment in other states. Gupta and Mills (2002) find suggestive evidence that firms optimize reported sales locations in response to sales appor- tionment factors. Klassen and Shackelford (1998) find that manufactur- 13 This is sometimes referred to as a “double-weighted” sales apportionment factor. state taxation and the reallocation of business activity 1269 ing shipments from states that tax throwback sales are decreasing in the corporate income tax rate on sales. Businesses also pay an array of other taxes, notably sales taxes, unem- ployment insurance contributions, and property taxes. Furthermore, states often grant targeted tax incentives and financial assistance for spe- cific industries. These taxes are not the primary focus of our paper, but we do include controls for all of these factors in our analysis. B. Conceptual Framework The literature has used several different frameworks to model firm loca- tion decisions as a function of tax policy. Early literature on the econom- ics of the corporate income tax assessed its incidence and efficiency when the corporate sector produced one set of goods and the noncorporate sector another set of goods (Harberger 1962; Shoven 1976). In these clas- sic settings, the corporate income tax resulted in a redistribution of re- sources in the economy toward the goods produced by the noncorporate sector and therefore a deadweight loss.14 These incidence models are relevant in that they recognize that more mobile factors will escape taxes by flowing into sectors where they are not taxed as heavily. To escape the heaviest tax burden, factors of production may haveto be redeployed less efficiently. The originalintuitionfromHar- berger (1962) was that, under a set of assumptions, a higher tax burden would drive capital (whose supply is fixed in aggregate) from the taxed into the untaxed sector, and in equilibrium the incidence of the tax would be on the returns to capital in both sectors. Open economy analyses of corporate tax incidence show immobile workers bearing the burden of the tax through lower labor compensation, as capital moves to jurisdic- tions where it will face lower taxes (McLure 1980, 1981; Kotlikoff and Sum- mers 1987).15 The traditional incidence analyses feature a fixed stock of capital and supply of labor making them not particularly suitable to a setting in which firms can invest in new capital and potentially draw on or release surplus labor. Furthermore, their primary goal is to explain the distribution of the burden of the tax. The mobility of labor and capital is better seen as an ex- planatory factor in their analyses.16 In contrast, our paper is a study of the effects of taxation on the utilization of labor and capital by firms in differ- ent locations. 14 Gravelle and Kotlikoff (1989) examine efficiency costs of corporate taxation when corporate and noncorporate firms produce the same good, finding logically that such deadweight costs can be substantially higher. 15 Gravelle (2013) demonstrates the sensitivity of these models’ conclusions to modeling inputs such as factor, product, and capital substitution elasticities. 16 For example, Suarez Serrato and Zidar (2016) use establishment elasticities as an in- put to their spatial model for calculating incidence. 1270 journal of political economy Given that our goal is to explain location decisions, a more appropri- ate conceptual framework for our empirical setting is provided by Dever- euxandGriffith(1998),basedonHorstmannandMarkusen(1992).Firms in this model make up to three choices: (1) all choose whether to sell in the domestic market only or to sell in foreign markets as well; (2) those firms that choose to sell in foreign markets then choose whether to export to the foreign market or to set up production in the foreign market (in the case of services, only the latter would be possible); or (3) conditional on producing in the foreign market, the firm can choose to produce in any one of a number of locations. Devereux and Griffith (2003) build on this model further, highlight- ing that on the margin of new capital investment, taxes operate through a conventional cost of capital channel. The level of capital investment is therefore influenced by the marginal effective tax rate, defined as the share of the firm’s required return on capital that goes to the federal gov- ernment rather than to investors (Fullerton 1984). Formally, the marginal effective tax rate (ETR) is defined as a function of the statutory tax rate t, the marginal product of capital f 0ðkÞ, the rate of economic depreciation of capital (d), and the after-tax cost of capital ultimately demanded by in- vestors (r): ETR 5 f 0ðkÞ 2 d 2 r f 0ðkÞ 2 d : (1) It is usually assumed (as in Hall and Jorgenson [1967]) that firms set the marginal product of capital equal to the implicit rental value of capital services: f 0ðkÞ 5 r 1 dð Þ 1 2 ITC 2 tzð Þ 1 2 t , (2) where ITC represents the rate of any investment tax credits, and z repre- sents the present value of depreciation deductions. Gravelle (1994) and Gruber and Rauh (2007) calculate marginal effective tax rates by industry as a function of the specific mix of capital types employed in the produc- tion process, the estimated rates of economic depreciation of each type of capital, and the present value of allowable depreciation deductions for each type of capital. In the … Politics/Policy Companies' Foreign Tax Havens Cost You Plenty Microsoft, Pfizer, and other businesses avoid U.S. taxes by keeping billions in profits overseas. Here's what the revenue would add up to, per person, if states and the IRS could get it. States that would gain the most per capita It O Less than$750 0$750-$999 0 $1,000 -$1,249 $1,250 -$1,500 • More than $1,500 Oregon $1,022 A 2013 state law requires companies to report and pay taxes on profits stashed in 39 overseas havens Montana $1126 The first to recover overseas taxes with a 2003 law that's a model for other states school spending, and simple inflation will tend to cause spending to rise, not fall, in the years ahead. The question is whether Brownback will still be in office to try to keep that from happening. -Peter Coy The bottom line In Kansas, income growth is lower than neighboring states' despite- or because of-steep tax and budget cuts. Taxes States Target Corporate Cash Stashed Overseas ► Laws require companies to pay state taxes on sheltered profits ► It's "not smart, and not fair" to let businesses hide money abroad Members of Congress have complained for years about U.S. corporations that park profits overseas to avoid paying federal taxes. Yet efforts to pass corporate tax reform that includes incentives and penalties to prod busi­ nesses into bringing that money home have stalled in Washington. Tired of waiting for a fix, several states are going after state tax dollars that disappear into offshore havens. Oregon enacted a bill last June for the 2014 tax year identifying 39 countries and territories-including Barbados, Liberia, and the U.S. Virgin Islands- as corporate shelters. The state counts profits that corporations and their subsidiaries stash in shelter countries as taxable income, and companies that do business in the state must report it on their state tax returns and pay up. On April 16 the Democrat-controlled Maine legislature gave final approval to similar legislation, over objections from some Republicans that it's anti­ business. Minnesota and Rhode Island are studying whether to pursue bills of their own. "The issue at hand is one of fairness," Maine Representative Adam Goode, a Democrat from Bangor, said during the debate on the bill he spon­ sored. "It really just seemed not in balance, not smart, and not fair that we would allow multinational corpo­ rations to hide their corporate income in a place like the Cayman Islands or in Bermuda." Offshore tax shelters cost the federal government $30 billion to $90 billion annually, according to a 2013 Congressional Research Service report. The U.S. Public Interest Research Group, which tracks corporate taxes, puts the amount that states lose at $20 billion a year. The largest U.S.­ based multinational companies have accumulated $1.95 trillion in profits District of Columbia $2,783 North Dakota $2,547 Wyoming $2,546 Connecticut $2,537 New York $1,919 Massachusetts $1,886 California $1,783 New Jersey $1,560 Illinois $1,396 Colorado $1,361 DATA: U.S, PIRG outside the U.S. That's up $206 billion, t or 11.8 percent, from a year earlier, according to securities filings from 307 corporations. Microsoft, Apple, and IBM accounted for $37-5 billion, or 18.2 percent, of the total increase during the past year. Caterpillar avoided $2.4 billion in U.S. taxes over more than a decade by shifting profits from a parts business to a subsidiary in Switzerland, according to a report issued on March 31 by a Senate committee. The company says the move was legal and appropriate. "To the extent that they have figured out ways to avoid paying their proper share, then it's our job to try to prevent them," says Oregon State Representative Phil Barnhart, a Democrat who spon­ sored tax-haven legislation there. The model for the recent legislation is Montana, which began taxing shel­ tered profits a decade ago, followed by Alaska, West Virginia, and the District of Columbia. Montana recouped $7.1 million in taxes in 2010 from com­ panies that held money in five top havens, according to a 2012 state report. Oregon estimates its new law will allow it to bring in $18 million a year initially. Maine projects $5 million in additional yearly tax revenue if Governor Paul Le Page, a Republican, signs the bill. (He hasn't said whether he will.) That's not much by Washington standards, ► Read "States Target Corporate Cash Stashed Overseas," by Niquette and Rubin, from Bloomberg Businessweek (2014). URL: https://lopes.idm.oclc.org/login?url=http://search.ebscohost.com.lopes.idm.oclc.org/login.aspx? direct=true&db=bth&AN=95663541&site=ehost-live&scope=site Politics/Policy A but it's a sizable windfall for smaller states struggling to meet their budgets. Few of the states that have passed or are contemplating tax-haven legisla- tion are home to a large multinational such as Microsoft, which is based in Washington, or Apple in California, IBM in New York, or Caterpillar in Illinois. Those states would stand to collect far more from such measures. California lost the most to offshore havens in 20lt, an estimated $3.3 billion, the Public Interest Research Group reports. Ron Erickson, a former lawmaker who spon- sored Montana's bill in 2003, expects more states to start demanding their share. "I'm discouraged that it's gone this slowly," he says, "but I'm also of the confident sort that thinks that eventually fairness wins out." —Mark Niquette with Richard Rubin The bottom line States want their share of $20 billion in lost tax revenue from companies that park profits in foreign tax havens. Tradt Delta Attempts to Ground T h e Bank of Boeing' • The airline demands an end to U.S. loans to help foreign rivals buy jets • The Export-Import bank is a "corporate-welfare slush fund" This year Congress will debate whether to renew the charter of the Export- Import Bank, the 80-year-old federal institution that helps U.S. compa- nies sell products and services over- seas by providing loan guarantees and otber sweeteners to foreign buyers. And like the last time the bank came up for renewal, in 2012, that debate will reig- nite a bitter, years-long feud between two big American companies: Boeing, which lobbies furiously to protect the bank, and Delta Air Lines, which presses just as hard to eliminate the bank's finan- cial aid for foreign buyers of Boeing's largest jets-who also happen to be Delta rivals. The Ex-Im Bank put up $27.3 billion in 2013 to help small and large U.S. companies close deals overseas. It provided a South African company with $230 million in loan guaran- tees to buy 100 locomotives built by General Electric and gave a $155 million direct loan to the Republic of Ghana to finance a hospital expan- sion designed and built by Miami- based Americaribe. Over the years, though, no U.S. company has bene- fited more from the agency's largesse than Boeing. In 2013, the Ex-Im Bank offered $7.9 billion in loan guarantees to help the manufacturer sell 106 of its airplanes to foreign airlines in two dozen countries, reinforcing Ex-Im's Washington nickname-"the Bank of Boeing." Delta, a major purchaser of Boeing jets, says the bank gives an unfair boost to its overseas competitors. In an April 7 letter to the House Committee on Financial Services, Lee Moak, a Delta captain who's president of the Air Line Pilots Association, said the "bank's unnecessary financing of wide-body aircraft" gives foreign car- riers an "annual economic advan- tage" of $2 milfion per aircraft. 'People on both sides of the political spectrum see that government should not be picking winners and losers." Senator Mike Lee (Boeing disputes this figure.) Conservative groups and their allies in Congress have taken up the cause, saying the bank isn't needed because foreign companies can get financ- ing without the Ex-Im Bank's help. They also argue it bene- fits some U.S. companies over others. "People on both sides of the political spectrum see that government should not be picking winners and losers in business," says Republican Senator Mike Lee of Utah, who wants to close the bank. The Club for Growth calls the Ex-Im Bank a "corporate-welfare slush fund." Those are the same words Barack Obama used to describe it when he was running against government breaks for big corporations as a pres- idential candidate in 2008. He's since changed his mind and joins most Democrats in backing the bank and praising the financial aid that makes Boeing and other U.S. companies more attractive to foreign customers. Boeing President and Chief Operating Officer Dennis Muilenburg told an April 3 meeting of the U.S. Chamber of Commerce-which supports the Ex-Im Bank-that it's an "important tool" helping U.S. exporters to better compete around the world. The chamber and other backers point out that Airbus receives generous export credit assistance from European gov- ernments. Ending the bank's financ- ing for large aircraft exports "would amount to unilateral disarma- ment," Muilenburg said. Bank officials say their loans and guar- antees cUnch deals that Jets vs. Jobs In 2011 court documents, Delta Air Lines blamed the Export-Import Bank for a loss of as many as 7500 U.S. airline jobs, saying foreign airlines increased their passenger capacity after buying Boeing jets using Ex-Im Bank loan guarantees. E LTA In Its 2013 annual report, the Ex-Im Bank countered that its lending helped companies—including Boeing—sell billions of dollars worth of U.S.-made products overseas, supporting more than 2 U.S.jobs. • • • • • • • • • I Copyright of Bloomberg Businessweek is the property of Bloomberg, L.P. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.