Interview with Michael Mazerov: Oklahoma can put an end to abusive corporate tax shelters

Michael Mazerov is a Senior Fellow with the Center on Budget and Policy Priorities, where he specializes in state and local taxation of businesses. This interview was conducted by e-mail on October 25, 2011. For additional information on combined reporting, see Michael’s issue brief.

David Blatt: What problem is combined reporting trying to address?

Michael Mazerov: Most large multistate corporations are actually corporate groups, with a parent corporation that owns numerous subsidiary corporations.  That structure allows members of the corporate group that are subject to Oklahoma’s corporate income tax to engage in artificial transactions at artificial prices with members of the group that aren’t in Oklahoma, in order to shift profits that are earned in Oklahoma beyond the taxing power of the state.  The profits get shifted on paper onto the books of the out-of-state parent or subsidiaries that Oklahoma doesn’t have the legal authority to tax.

DB: What are some examples of questionable tax avoidance strategies that multi-state corporations have used to avoid paying state corporate income taxes?

MM: Well, the classic example is the so-called Delaware Holding Company tax shelter.  A retail store chain with a well-known trademark like Toys R Us’ Geoffrey Giraffe sets up a subsidiary in Delaware and then transfers the trademark to the subsidiary.  The subsidiary licenses the right to use the trademark back to all the stores in Oklahoma in exchange for a royalty payment that is a flat percentage of the store’s sales.  The royalty is a deductible expense for the stores, and so reduces the taxable income of the stores in Oklahoma.  Meanwhile, Delaware doesn’t tax the income of these kinds of subsidiaries.  So the company has reduced its overall tax liability, and Oklahoma has lost some of the tax payment it was legitimately due from this company.   Now, Oklahoma successfully litigated a case against Toys R Us specifically to force its Delaware subsidiary to pay corporate income tax on its Oklahoma royalty income to Oklahoma.  But pursuing this kind of litigation on a company-by-company basis is costly and impractical, and there’s no evidence that most companies using this tax shelter in Oklahoma started paying the amount of tax they should be paying simply because Oklahoma won this one case against this one company.  Oklahoma really needs to change its laws to ensure across-the-board compliance, and combined reporting is the best way to achieve that.

DB: How does combined reporting work?

MM: Combined reporting is just what its name suggests; companies are required to combine, or in other words, to add together, the profits of the members of the corporate group that are in Oklahoma with the profits of the members of the group that aren’t in the state.  Then the state taxes a share of the combined income of the group.  That way, the corporation doesn’t gain any benefit by trying to shift income to other members of the group, because even if it does that those shifted profits get added back to form the Oklahoma taxable income of the business.

DB: What’s the position of the business community on combined reporting?

MM: Well, not surprisingly, many organizations representing big corporations oppose combined reporting because it’s an effective means of nullifying corporate tax sheltering strategies.   They want to maintain maximum flexibility to report their incomes wherever it will minimize their overall nationwide state corporate tax liability, and combined reporting restricts their ability to do that.   Smaller corporations should support combined reporting, because they usually don’t have the resources to set up these kind of sophisticated tax shelters that exploit the absence of combined reporting.  They often compete with large multistate companies that are able to reduce their tax payments through these kinds of shelters, and combined reporting can help level the playing field.  Individual small businesses do sometimes publicly support state adoption of combined reporting, as do some large multistate corporations.  The latter may seem a little surprising, but a large number of multistate corporations actually can pay less tax to a state if it adopts combined reporting.

DB: In your view, should Oklahoma adopt combined reporting?

MM: Oklahoma absolutely should adopt combined reporting.  Other than the case against Toys R Us that I mentioned, it has done almost nothing to inoculate itself against Delaware Holding Companies and the other major tax shelters that exploit the absence of combined reporting.  It has done way less on that score than even most other non-combined reporting states.  That’s unconscionable at a time when the state has been experiencing such serious budget shortfalls and has been forced to make deep cuts in critical services.  The prevalence of these tax shelters has been well known for decades now, and it’s time to put a stop to them.

DB: What’s the situation in other states?

MM: Combined reporting has been adopted by a majority of the states that have corporate income taxes or similar taxes for which combined reporting is relevant; specifically, 23 out of 45, plus the District of Columbia.  Kansas and Texas are both combined reporting states.  If you look at a map to see the states in a line all the way up from Texas to the Canadian border, Oklahoma and New Mexico are the only states west of that line that are not combined reporting states.

Status of Combined Reporting As of April 2011: Center on Budget and Policy Priorities

DB: How difficult would it be to transition to combined reporting?

MM: Well, seven states have made that transition just since 2004, including relatively small states like Vermont and West Virginia.  It requires some adjustments on the part of taxpayers and tax administrators, but it’s manageable.  I and other analysts have done research in various states demonstrating that the vast majority of large multistate corporations already do business in numerous combined reporting states and therefore are already filing tax returns based on combined reporting.  The additional effort entailed for those companies in filing a tax return based on combined reporting in Oklahoma would be minimal.


Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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