Proposed Water's Edge CIT Legislation  
MANDATORY WATER’S EDGE COMBINED REPORTING BILL FILED Proposed legislation recently filed in the Florida Senate (SB 2766) and House of Representatives (HB 1237) would require the use of water’s edge combined reporting for Florida corporate income tax purposes effective for tax years beginning on or after January 1, 2009. While it is still too early to predict the fate of this Democratic proposal in the Republican-controlled Legislature, the bill purports to raise several hundred million dollars in revenue and bears monitoring in a time of substantial state budget deficits. The bill also contains several provisions of interest to corporate taxpayers that are seemingly unconnected to implementation of a combined reporting system. The water’s edge bill would repeal Florida’s current consolidated group filing election (§18), as well as the “grandfather” nexus group election (§17), and require the filing of a water’s edge combined return by a unitary group. The bill defines a “water’s edge group,” in pertinent part, as “a group of corporations related through common ownership the business activities of which are integrated with, dependent upon, or contribute to a flow of value among members of the group” (§2). A 50% or greater stock ownership threshold is used to identify those corporations that will be deemed a part of the group; at less than 50%, all elements of a corporation’s business activities must be examined to determine whether it will be deemed a member of the group. (Id.) The “water’s edge group reporting method” is defined as “the determination of taxable business profits for a group of entities conducting a unitary business by adding combined net income and the additions and deductions provided in s. 220.13 for members of the group and apportioning the results as provided in ss. 220.15 and 220.151“ (§4). Provision is also made for calculating the apportionment factors for special industry group members. (Id.) The bill contains several interesting provisions that appear tangential to implementing a mandatory water’s edge combined reporting system. First, the bill creates a presumption that all income of a water’s edge group is apportionable business income, and imposes a corresponding burden of proof on the taxpayer to show that it is not a member of a water’s edge group and that income is not apportionable business income (§2). Second, the statutory apportionment formula must be used for all members of the water’s edge group, unless an alternative method is determined to be “more appropriate” by the Department of Revenue (§4). Third, the bill would eliminate intercompany sales among members of the water’s edge group from calculation of the sales factor (§4). Fourth, the bill would require a water’s edge group to file a “domestic disclosure spreadsheet” detailing its income and tax liability reported to each state, the methods used to allocate and apportion income among the states, and “other information” that the Department of Revenue may require by regulation to determine “the proper amount of tax due to each state” (§4). The sponsors estimate that the bill will generate approximately $400 million in additional revenue annually, of which $100 million would be earmarked for workforce education and the balance used to “buy down” the required local effort for public school funding (§19). Further information regarding SB 2766 and HB 1237, including legislative staff analyses, committee assignments, and amendments may be found on the Legislature’s website, www.leg.state.fl.us.

Posted: 2008-04-02 00:00:00.0

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