State income tax planning and differential reporting methods

This study investigates taxpayer behavior in the corporate state income tax area. Corporate state income tax regimes differ in many respects. Taxpayers operating in more than one state are presented with opportunities to exploit these various differences to reduce their state income tax burdens. While prior research has studied tax planning with respect to certain features of state taxation, there is little research on state tax reporting methods. The purpose of this study is to investigate tax planning that takes advantage of differential state tax reporting methods.;Multistate organizations with operations in states that employ different reporting methods can exploit these differences to reduce their overall state tax burdens. A discussion of state income taxation explains how the different reporting methods work and illustrates how taxes can be reduced. A review of the extant literature reveals how little we currently know about tax planning relative to reporting methods.;Based on the foregoing foundation, I provide evidence of corporate state income tax planning from tax data collected at the state level. I regress state corporate income tax collections for 1980 through 1998 on a dichotomous reporting method variable. Results of the tests indicate that states using separate company reporting have lower corporate income tax collections than other states. These results are consistent with corporate taxpayers exploiting differential state tax reporting methods to reduce their overall tax burdens.;Building upon the state-level results, I provide evidence of corporate state income tax planning at the firm level. Tests are conducted on data from the banking industry for the years 1991 through 1993. This setting provides a unique research opportunity because it includes two characteristics necessary to study state tax planning—the existence of opportunities to engage in state tax planning and the availability of data to test for such tax planning. I regress state effective tax rates (SETRs) for the banks on a dichotomous filing method variable. These tests indicate that SETRs in separate company reporting states are significantly lower than the SETRs of banks operating in other states. These results are consistent with corporate tax planning to take advantage of differential reporting methods.;To investigate how such tax planning is achieved, I regress the banks' net securities gains on a dichotomous filing method variable. Results indicate that there is a significant negative relationship between these net gains and the use of separate company reporting. These results further corroborate the more general results that corporate state income taxes are negatively related to the use of separate company reporting. Furthermore, these findings indicate that the differences observed in state taxes, both at the state level and also at the firm level, are due at least in part to tax planning to exploit differential reporting methods.