Adopting California's sales-based corporate tax system would simplify the tax code and level the playing field.


Recently California voters approved a proposition that, if adopted on a national level, would end a tax loophole that allows many U.S. corporations to pay little or no income tax. The "sales-based apportionment" system that voters in California enacted should be used to close our country's corporate tax-haven loophole.

Under current U.S. corporate tax law, American corporations can manipulate profits so that they appear to be made in an offshore tax haven like the Cayman Islands, then pay no U.S. income tax on that income so long as it is kept out of the country. And keep it out they do. It is estimated that as much as $1.7 trillion in untaxed corporate profits now sits offshore instead of these companies bringing it back to our country, paying the taxes due and then either paying it out to shareholders or investing it to "create jobs," modernize American factories, research facilities, equipment, etc.

The good news is that California has developed a simple solution that neutralizes this loophole, Proposition 39. It works like this: A company that sells its products or services in California will pay income tax related to those sales.

For example:

  • ABC Corporation has $10 million of sales of MP3 players in 2012.
  • $1 million of those sales (10% of total sales) are made in California.
  • ABC Corporation's total worldwide profit from all MP3 sales is $1 million.
  • 10% of that profit is related to California sales.
  • So 10% of ABC Corporation's worldwide profit will be taxed by California as California income.

Notice that it does not matter whether the ABC Corporation is a California, U.S., multinational or foreign corporation.

Adopting California's sales-based corporate tax system would simplify the tax code and level the playing field. All companies, foreign and domestic, would determine tax liability by calculating sales and pretax profits as the U.S. percentage of their overall sales. (Because it would tax U.S. sales of domestic and foreign businesses, it would also broaden the base, opening the door for lower rates.)

However, instead of closing loopholes and paying the taxes they owe, multinational corporations are currently pushing for a "Territorial Tax" system which would let them dodge taxes on profits made outside of the United States at all. This would obviously encourage companies to move profit centers out of our country.

Modernizing our tax code to account for a modern world requires changing to a straightforward and equitable method of determining tax payments, such as California's. Under sales-based apportionment, it is conceivable that a medium-size corporation could file its report on a single sheet of paper attached to its annual Form 10-K filed with the SEC without needing the help of a tax attorney.

At a time of sequester and budget austerity, we can no longer tolerate the abusive tax loophole of offshoring corporate profits. There is no reason why California's solution will not work on a national level. As Justice Brandeis famously wrote, "a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." California has shown the way and we should follow.

Bill Parks is a retired professor of finance. He is also founder and president of NRS, Inc., a major manufacturer and distributor of paddlesports recreation equipment. NRS has paid corporate taxes for more than 30 years.

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