Seeking to shift tax load, panel eyes businesses Legislators mull several plans

AUGUSTA – As the Legislature’s Appropriations Committee seeks to reach agreement on a two-year state budget, several proposals to gain more tax revenue from businesses are under consideration. The businesses being targeted are based out of state but do business in Maine, and the intention is that there be minimal impact on Maine-based firms.

“We are looking at exporting some taxes, yes we are,” said Sen. Karl Turner, R-Cumberland, a member of the committee. “These efforts are not aimed at Maine-based companies, but some changes might apply.”

The panel already has given tentative approval to a change in the way out-of-state businesses get taxed on the business they do in Maine. Like most states, Maine has taxed businesses located out of state that do business in Maine through a complex formula based on sales in the state, employment and investment.

The state would change that by basing its taxes only on sales in the state. Jerome Gerard, acting executive director of Maine Revenue Services, said 14 of the 43 states that assess income taxes use the “single factor” tax assessment method.

“It is any entity, not just corporations,” he said. “This is any pass-through entity, like partnerships or S corporations, that are based out of the state but [do] business in Maine.”

Gerard said the move would shift more of the tax burden to retailers and reduce the tax burden on manufacturers. It also is expected to generate another $6 million a year in tax revenues to help balance the state budget.

At a work session on Monday, he proposed “tweaking” that portion of the law to capture another $1 million a year by extending the reach of the Maine income tax laws to business entities based in other states that provide a service in Maine. Gerard said as the country moves from a manufacturing to a service-oriented economy, old ways of assessing taxes need to be updated.

“This would use a destination or a market state method, which assigns the sale to the state where the purchaser is located,” he said.

Some committee members were concerned the approach could result in a business being taxed both in Maine and in its home state. Gerard said that is not uncommon now.

“Double taxation does occur,” he said. “The tax laws are riddled with inequities and that’s why there are plenty of accountants and plenty of lawyers to help better position entities to avoid any double taxation.”

Some lawmakers, including Rep. Patrick Flood, R-Winthrop, are cool to Gerard’s idea. He pointed out that a business hit with double taxation would likely just pass on the additional cost to its customers.

The panel is also exploring another tax change that would generate at least $5 million a year by changing the way the state taxes a wholly owned insurance company set up by a business to provide its insurance coverage. While the usual purpose is to provide health insurance, some very large companies have set up these “captive” insurance subsidiaries for other insurance coverage.

The committee’s House chairman, Rep. Jeremy Fischer, D-Presque Isle, said the proposal would close a “loophole” that has allowed some large firms to avoid paying taxes on part of their income.

“It’s a shifting of profits that should be taxed under the corporate income tax, so Maine citizens in Presque Isle and Portland and all over the state are paying more because some large corporations are sheltering their income by doing this,” he said.

But some members of the panel are uncomfortable with the proposal. Rep. Sawin Millett, R-Waterford, said he is worried there may be some Maine companies that are using the approach.

“I am still troubled with the lack of ability to know what impact if any there would be on Maine-based companies that would result in their bearing a tax burden they are not now bearing,” he said.

The panel also has tentatively approved steps to use contractors and hire a new revenue agent at Maine Revenue Services to collect more taxes that are owed the state but have not been paid. The effort is projected to bring in about $1 million a year.

“This is money we are owed and we should do everything we can to get what is owed us,” said Sen. John Martin, D-Eagle Lake, at a recent work session.

The committee hopes to complete work on the budget this week and take final votes on what it will recommend to the Legislature.