Lawmakers reshaped Rhode Island’s tax code this summer, cutting taxes in some areas and raising them elsewhere in a bid to improve the state’s much-maligned business climate while plugging revenue gaps.
The changes, most of which take effect Jan. 1, have an eye toward how the state is perceived nationally, but will be felt most directly by existing Ocean State companies and in some cases signal where future state tax policy may be heading.
So which industries have the most to gain from the changes and what do companies need to know when most of the changes go into effect next year?
Tax professionals say large, in-state companies able to take advantage of the 2 percentage-point reduction in the corporate tax rate and a series of shifts in how those taxes are calculated stand to benefit the most.
Although the rate cut grabs the headlines, those calculation changes – including combined reporting, single-factor apportionment and market-based sourcing – could be equally important in determining some firms’ liability.
In general, the changes in Rhode Island’s state tax structure have similarities to national proposals, such as the Marketplace Fairness Act, that would base corporate taxation more on firms’ sales than their physical facilities.
As a result, these changes may benefit asset-intensive businesses, such as manufacturers, and locally based firms more than offshore conglomerates.
“Combined reporting and some of these other changes kind of work together and are in keeping with what Congress has been noodling around with on the Marketplace Fairness Act,” said Norman LeBlanc, partner at Kahn, Litwin, Renza & Co. Ltd. in Providence. “They are going to look at these firms as one big company and tax all of the sales where they take place.”
The rate cut drops Rhode Island’s corporate rate from the highest in New England at 9 percent, to 7 percent, tied for the lowest unified rate in the region. (Vermont has three brackets with the lowest at 6.5 percent.)
Combined reporting requires large, multipart companies with a physical presence in Rhode Island to file as a single entity and bases its corporate tax bill on that larger income pool instead of a single affiliate’s income.
That larger income pool for large organizations is somewhat offset by the rate reduction and the move to single-factor apportionment in calculating the size of tax liabilities.
Renza & Co. Ltd.¸ Marketplace Fairness Act,
R.I. Division of Taxation,
Gilstein and Co. LLP,
Underground Economy and Employee Misclassification Task Force,