Legislation would reform the Delaware Corporate Income tax to remove barriers to job creation and simplify compliance for small businesses.
Dover, DE – HB 235, known as the Delaware Competes Act and sponsored by leadership of both the Democratic and Republican parties of the House and Senate, was introduced today in advance of next week’s commencement of the 2016 General Assembly.
The bill would reform the way that the state apportions income tax for corporations to remove elements of the code that are disincentives for new investment and job creation. Under current law, companies that create jobs or invest in property in the state must pay more corporate income tax. While the Delaware Competes Act does not change the tax rate, it changes the apportionment formula to remove those disincentives, and calculates taxable income using the revenue generated by a business’ activities in the state.
The Delaware Competes Act also makes several changes to the code to simplify the filing process for small businesses, and gives them added protection from being penalized for filing errors.
“This bill will ensure that Delaware will continue to be an attractive place for businesses to relocate or expand,” said Governor Jack Markell. “I am grateful to the leaders of both parties for supporting these common sense reforms that will benefit all Delawareans. Employers should not have to pay more in taxes just because they decide to create more jobs in the state.”
House Majority Leader Valerie Longhurst, who is sponsoring the bill, noted that the measure will benefit many small businesses throughout the state by reducing and simplifying filings they must submit, protecting them from being penalized due to errors during filing.
“Most other states have abandoned this method of calculating corporate income tax, which leaves Delaware at a competitive disadvantage. By taking these steps, we are putting Delaware on a level playing field with our surrounding states,” said Rep. Longhurst, D-Bear. “I’m pleased that leaders on both sides of the aisle have quickly come together to make Delaware an even better place for businesses. I hope we can continue to work together on other efforts to address our fiscal situation.”
In recent years, more and more states have adopted this method of apportionment, with Pennsylvania, New Jersey, and New York among those who have made similar adjustments.
Senator Patricia Blevins, the lead Senate sponsor and President Pro Tempore of the Senate, hailed the bill as an example of what can be accomplished when the parties are willing to come together and put the interests of citizens before politics.
“Adjusting to our rapidly changing economy means both parties must quickly coalesce around some new ideas that put Delawareans first,” Blevins said. “I’m proud that more often than not, that’s the spirit that carries the day in Legislative Hall, and I’m hopeful that our cooperation on this issue will set the tone for this upcoming legislative session.”
“This bill will reform our corporate income tax calculation, remove a disincentive for job creation, and make us more competitive with other states. It is a positive, bipartisan step towards improving Delaware’s business climate,” said House Minority Leader Danny Short, a Prime sponsor of the bill.
Senate Minority Whip Greg Lavelle, another Prime Sponsor, said that the bill was a win for both our citizens and business community. “Being able to review and modify our corporate income tax structure is worthwhile and worth doing. It’s a big deal.”
Business community leaders also expressed their support for the Delaware Competes Act. “The Delaware State Chamber of Commerce is pleased that the Administration and General Assembly are taking this step to help make Delaware more competitive regionally and nationally,” said A. Richard Heffron, President of the Delaware State Chamber of Commerce. “Policies like these are what we need to attract and retain companies in Delaware, which is vital to our long term economic growth.”
Modernizing Delaware’s business taxes, as proposed in the Delaware Competes Act, was identified by the Governor’s Revenue Review Task Force as one way to provide more predictability and stability for Delaware’s Corporate Income Tax. “I am happy to see that the General Assembly is taking steps to enact this change,” said Josh Martin, Chairman of the Task Force. “This recommendation had unanimous support from the group, and its adoption would have a positive impact on the state going forward.”
The Delaware Competes Act has been assigned to the House Revenue & Finance Committee.
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HB 235 changes the method of calculating Corporate Income Tax apportionment. Currently, three factors are used to determine what portion of a company’s total income is attributed to Delaware for the purposes of assessment- their total payroll in Delaware relative to their payroll in the US, their total property holdings in Delaware relative to their property throughout the US, and their total sales in Delaware relative to their total sales throughout the country. The bill adjusts this calculation so that by 2020, attribution is determined 100% by using the ratio of sales in Delaware. It phases in this change over the next four years, weighting sales at a 50% rate in 2017, a 60% rate in 2018, and a 75% rate in 2019. Companies with headquarters in Delaware would see the shift to 100% take full effect in 2017.
The bill makes some other adjustments targeted to assist small businesses. Currently, businesses must make payments totaling 70% of their estimate total tax for the year by June 1st. This can be difficult for small businesses, because their revenue is frequently more volatile than larger corporations, and their cash flow is often more challenging to manage. The bill allows small companies to file 25% estimates each quarter, smoothing out the payments throughout the course of the year.
The legislation also adjusts the threshold for the safe harbor from penalties for incorrect estimates. The safe harbor provision for small businesses was enacted in 1984, but the qualification threshold has not been adjusted, so many small businesses no longer qualify. The bill adjusts the qualification threshold and indexes it against inflation, so small companies will remain eligible as originally intended. The threshold for qualification to report gross receipts data quarterly instead of monthly is also adjusted, meaning smaller businesses will not have to go through the reporting process as often as they currently do. Finally, the bill clarifies that, for the purposes of income attribution, only US based assets are part of the calculation. This has been done in practice since a court ruling mandated it several years ago, but was never codified.
Full text of the legislation can be found here.
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