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Sunday, September 27, 2009

N.M. Must Close Big-Box Tax Loophole

By Sen. Peter Wirth
Democrat, Santa Fe
          New Mexico-based businesses are the backbone of the state's economy, but you might not get that impression by looking at our tax code. Using "economic development" as the justification, we have made the decision to give multistate businesses, many of whom are already doing business in New Mexico, preferential tax treatment all to the detriment of our local companies. It's time for this to stop.
        With greater buying power and bigger advertising budgets, large multistate corporations, chains and "big-box" stores start with the upper hand. That is basic economics and is perfectly appropriate. But we then deal these same companies a trump card by allowing them to shift their profits earned in New Mexico to a state like Delaware that does not charge corporate tax. New Mexico profits reported on a Delaware tax return? Hard to believe that could happen but that's exactly what we allow.
        New Mexico is one of just two Western states that put its homegrown businesses in this predicament. Think about it. The same big-box and chain stores that operate in Arizona, California and Oregon pay corporate income taxes on the profits they make in those states. Yet here in New Mexico we give those companies taking advantage of our law a free ride. What kind of economic development are we promoting?
        The fix is pretty simple: legislation that requires "unitary combined reporting." It's a technical term that means corporations operating in multiple states have to combine the profits of all their subsidiaries and report them under one corporation. A formula is then used to determine how much tax is owed to each state. For example, under unitary combined reporting, all the Toys-R-Us stores would have to file their tax returns as one company. Under current law, the Toys-R-Us stores in states like New Mexico can file as a "separate entity" — one that, quite conveniently, must "pay" its home office for the right to use the Toys-R-Us giraffe logo, a payment deducted from the company's taxable income.
        Mandating combined reporting would also stop other creative accounting tricks that multistate corporations use. Real estate investment trusts (REITs) are one example. A multistate corporation creates a trust, which then "owns" the company's New Mexico stores. The New Mexico stores pay rent to the trust for the use of the stores, and then deduct the rent from their taxable income. Again, it's a way to transfer New Mexico profits out of state from one part of the corporation to another and avoid paying tax in our state.
        This will be the fifth year I have introduced a bill at the state Legislature to require unitary combined reporting. Each prior year the bill has been defeated. Sadly, some of the chambers of commerce and business associations that claim they represent all businesses have been the groups working to kill the legislation pitting the interests of local business against these multistate giants.
        All of us lose under the current corporate tax laws, which cost New Mexico $40 million to $50 million a year in lost revenues, even in this bad economy. These are tax dollars that should be contributing to the programs and services — education, health care and public safety — that benefit all New Mexicans. Requiring all companies doing business in our state to pay the same taxes will create a more competitive environment for New Mexico businesses and keep the New Mexico profit earned by their multistate competitors here in the state.
        It's time to close this tax loophole and level the playing field for all businesses operating in New Mexico.