Vermont Legislature SmartTranscripts:

[Emilie Kornheiser (Chair)]: Hope everyone had a good lunch. I've already lost track of what day of the week it is. It is January 15. It is 01:15. We are here in the Ways and Means Committee room. And not at this wrong week's schedule. It's January Yes. Thank you for your help. I'm so glad you're here. Makes all the difference. Anyway, it's 01:15, and we're gonna continue our work on the corporate income tax with a combination of Pat and Kirby. Pat's listed first. Is that your desired plan of action?

[Unidentified Committee Member]: I, Kirby.

[James Masland (Member)]: Great.

[Emilie Kornheiser (Chair)]: Kirby, would you like to join us?

[Edward "Teddy" Waszazak (Member)]: Yeah.

[Emilie Kornheiser (Chair)]: Cool. Thanks. So on Tuesday, we had an opportunity to dive into the federal actions and how they're going to affect Vermont to some degree. Today, we're going to take a step back to what is our corporate income tax so we can better understand the relationship between the federal changes and our state level taxes, which I think from a learning perspective might have been a little reversed. But I think from an impacts perspective, makes sense? I don't know. So perfect way to do things. Thanks for your patience, Kirby. Of course.

[Kirby (Legislative Counsel)]: Sure. I'm really hopeful. Mean, some stuff's going

[Patrick Chittenden (Joint Fiscal Office)]: to stick

[Kirby (Legislative Counsel)]: today. I'm probably saying that because it's sticking for me, finally. So you'll see what I mean in a minute. Because Vermont had some large changes to corporate income tax a few years ago and we have to psychologically get used to that. Okay. Kirby B. A. Legislative Council. I am going to try to hit some of the really high points, answer some of the questions that I've heard from folks in the building recently. And so I'm going to try to focus on an FAQ type approach. So we're talking about corporate income tax. And we're going start off by talking about entities that are subject to Vermont corporate income tax, because this comes up when we have these assessments. There are three. But we're going to start, because I do law stuff, we're going to start with the law, The definition of corporation in the income tax chapter states, Corporation means any business entity subject to income taxation as a corporation, and any entity qualified as a small business corporation under the law of The United States. The part in red is the really important stuff. If it's subject to income tax of the corporation under federal law, we consider it subject to taxation. Vermont currently piggybacks on The US tax code when it comes to taxation of corporations. So the three types of entities that flow through are US residency corporations. Those are the ones we mostly talk about when we talk about this. But because the question comes up, I did want to call out once and for all, hopefully for all, these other things.

[Emilie Kornheiser (Chair)]: And referral.

[Kirby (Legislative Counsel)]: Sometimes this stuff can get mixed up

[Patrick Chittenden (Joint Fiscal Office)]: in our

[Kirby (Legislative Counsel)]: heads. Presentation I gave earlier this week, I mentioned S corps when I meant to say LLCs. So I want to correct the record on that one. It is sometimes LLCs that are taxed at C Corps. Then certain non profit organizations. And I'm going get into those three things. So the first is: What is a C Corp? That question comes up A a C Corp is determined by the taxpayer when they go to set up and organize their business. That is the answer. They make themselves a C Corp. There's many steps involved. I've put some of them here. Filing articles of incorporation of any state, appointing a board of directors, drafting corporate bylaws, issuing stock, and acquiring an employer identification number from the IRS. Those are all necessary parts and there's more than that that goes into it. The point is that the business makes itself a C Corp very intentionally and then it pays taxes as a C Corp intentionally. The next category was sometimes LLCs, right? So when do LLCs file a C corp? The answer is, it's up to them. They elect to be treated that way. So there's no case in which Vermont or the IRS is making a taxpayer LLC subject to corporate income tax. It's when they choose to be and it's when the tax treatment is favorable. I think we had a brief discussion last year about certain health For LLCs that have a lot of employees and they are paying healthcare for those employees, that's one instance where it might make sense because you get a lot of benefits under the federal corporate income tax in that situation. So you would want to choose to be treated as a C corp. But it's really those niche situations and it's a decision that an LLC will make with its accountant, whether it wants to elect to be treated as a C Corp. Many of them bounce back and forth year to year. That's a good question with the tax department because I don't follow that stuff. I

[Unidentified Committee Member]: don't think it's permissible

[Kirby (Legislative Counsel)]: from tax The election is for a certain number of years. I can look that up. Non profits. This is the other category. Sometimes non profits are taxed as C corps when they have what's called unrelated business income. Vermont has a provisional law about this specifically in our corporate income tax statute, and the Department of Taxes has Technical Bulletin 59 that is exclusively about this topic. But just so that you're aware, unrelated business income is income from a trade or business regularly carried on by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. I don't know, we could make up a charity and say that charity runs a gas station. They use the money from the gas station for their charity. They may have to pay some corporate income tax from the gas station aspect of what they're doing. Okay, so that's it. That is the tax base. Those are the taxpayers who potentially pay corporate income tax in Vermont. And as we said before, those are the tax payers who potentially pay at the federal level too. It's the same group in each case. So what is the tax base? Vermont net income is what we've been talking about for the structure of the corporate income tax. For Vermont, now we're talking about Vermont specific stuff. The tax rates, we have progressive brackets, marginal tax rates, and a minimum tax based on Vermont gross receipts. So that you are all aware, just hitting the high points here, the highest marginal bracket is 8.5%. That's the most that a corporation will pay at the highest level, marginal level. And it kicks in at income over $25,000 So relatively soon, right? We also have the minimum tax. So for corporations, they have to pay the higher of the two, whether it's using the tax brackets or the minimum tax. And under the minimum tax, a corporation that has over $300,000,000 in gross receipts from Vermont, as in bringing in gross receipts or the income you bring in all of it together with no deductions, the minimum tax would be $100,000 So that's the highest amount of the minimum tax.

[Carol Ode (Member)]: You said from Vermont, but you don't need only.

[Kirby (Legislative Counsel)]: In this case, it's Vermont gross receipts, yep. So once we have those things covered for a taxpayer, the next step is allocation and apportionment. And this is the parts that can get tricky and can throw us off. We're talking about the single sales factor, which is at this point in time, Vermont only looks at sales made into Vermont to decide tax liability for a taxpayer. Even I sometimes think of that wrongly. Sometimes I think about property or payroll. Those are the other kinds of factors. It's not part of it. It's just not. And so having everyone think of it that way, it's changed. Get it because I'm the part folks who need to not think of corporate income tax in terms of a business that's located in Vermont.

[Emilie Kornheiser (Chair)]: The way I think of it, Kirby, is instead of thinking about it as and I'm curious if this works is instead of thinking about it as the way of deter I know this is tech Instead of thinking about it as the base is everything that you described, and then you figure out the amount of tax responsibility by the sales into Vermont, I think about the base as corporations with sales into Vermont. And then I sort of think from there. And for some reason, that helps my brain more. Does that make sense to you as a way of almost defining the base? That

[Kirby (Legislative Counsel)]: does make sense to me. I'm trying to train myself to automatically think of it that way. But I'm going go through the steps of this allocation and apportionment, the single sales factor part of it. So the high point things to know is first that Vermont requires what's called unitary combined reporting. Corporations are often parts of families, groups of affiliated related corporations. For our purposes, for Vermont corporate income tax purposes, that entire family, that entire group of affiliated corporations are all one single taxpayer. And we'll get into this later, but if any one of them makes sales into Vermont, that whole group, that whole family of corporations is paying Vermont corporate income tax. So that's another thing to it's a conceptual thing to be aware of. So basic here, combined reporting, the term combined reporting treats affiliated companies like I was talking about that are part of a unitary group as the tax terminology, as one entity for tax purposes. That's combined reporting. Unitary combined reporting, adding unitary to it, means that multi state businesses that are part of the unitary group, unitary combined reporting, as in admitting one tax return for the whole group, applies to multi state businesses that are part of the unitary group and the portion of the unitary business that occurs both within and outside of our realm, which is what I was just saying, or of The US borders, sorry. So that means that some foreign income is included in that, too.

[Emilie Kornheiser (Chair)]: Let me just go back and sit first. You don't have say anything

[Kirby (Legislative Counsel)]: else. Okay,

[Edward "Teddy" Waszazak (Member)]: thanks.

[Kirby (Legislative Counsel)]: So unitary combined reporting. We've got that understood. Second is allocation and apportionment. The term allocation means when a C Corp's income is derived entirely from within Vermont, all of the C Corp's Vermont net income is allocated to Vermont. So that's when you use the word allocate. It's not most cases. But if there is a case of a corporation that only is making sales in Vermont, operating 100% entirely within Vermont, all of their corporate income tax would be paid to Vermont. It's allocated to Vermont. So apportionment is the slightly trickier one, and that's when there is a C Corp that is making sales into other places also. So when a C Corp's income is derived from both within and outside of Vermont, Vermont law portions a corporation's income that is allocated to the state based on a formula. And what is the formula? There's one part to it. One thing that we look at. Sales.

[Emilie Kornheiser (Chair)]: Oh, I meant it. I was being sarcastic. Thank you for mailing.

[Kirby (Legislative Counsel)]: And it's in bold right here. Vermont only looks at sales into the state when apportioning net income to the state. We use single sales factor that came out of Act 148 of 2022, so pretty recent. Property and payroll are not factored in. So now that we know about allocation of apportionments and based entirely off of sales into the state, how do you determine a state jurisdiction over a corporation's income though? We're about to find

[Patrick Chittenden (Joint Fiscal Office)]: out. Vermont

[Kirby (Legislative Counsel)]: is you've heard of the Joyce and Finnegan thing, but don't even worry about Joyce. That's not us. Ramad is team Finnegan. We take the Finnegan approach to answering this question. A taxpayer includes all members of a unitary group when we're deciding the tax liability of the unitary group, the family of corporations. Say a group consists of 10 corporations, only one of them makes sales in Trevermach. Under Finnegan, the Finnegan approach, all 10 of them are filing that tax return together. Of the income of all 10 of them is apportioned. And that apportionment is based on the sales of all 10 of them. So if one entity in the unitary group has nexus in the state, then the entire group has nexus and income from all entities is included in the apportionment formula.

[Patrick Chittenden (Joint Fiscal Office)]: You're

[Unidentified Committee Member]: probably going get to this. Just thinking about if you have a particular line of products that are sold in the state generating a certain amount of money, but that product line itself is not very profitable, and the other entities elsewhere are sold as extremely profitable,

[Kirby (Legislative Counsel)]: how do you determine what's taxable income and what's not? You look at the entire group, but I think what you're getting at is because a small fraction of the business activity is Vermont, then it will be a portion of the play.

[Emilie Kornheiser (Chair)]: But does the profit and loss of each of those particular products matter? Or is it the total profit and loss and the quantity of sales?

[Kirby (Legislative Counsel)]: It's the total profit and loss and the portion of it that is Vermont sales.

[Unidentified Committee Member]: It doesn't matter if I'm selling products that I'm not making any money on in the state of Vermont, it's a matter of fact that the total entity is actually making

[Patrick Chittenden (Joint Fiscal Office)]: money. Yes. Very interesting.

[Unidentified Committee Member]: And conversely, if the total entity is not making money otherwise, but they're making a ton of money if they buy, they do not

[Edward "Teddy" Waszazak (Member)]: pay taxes on the They're selling it if they?

[Unidentified Committee Member]: Yes, the selling. I'm just thinking gross profit margin, not gross sales.

[Edward "Teddy" Waszazak (Member)]: We

[Kirby (Legislative Counsel)]: do a portion of it based on the sales. The income subject to tax is Same percentage of our net income. Yeah, other part. Okay. So we're team fit again. That means the taxpayer includes all members of the unitary group.

[Emilie Kornheiser (Chair)]: Great time for diagrams. Find this a great topic for diagrams, which is not your bailiwick, nor should it be. It was not a criticism.

[Kirby (Legislative Counsel)]: Yeah, I would be better.

[Emilie Kornheiser (Chair)]: We're making choice and Finnegan jokes, and that's good enough for me right now.

[Kirby (Legislative Counsel)]: Some other things to know without getting into the weeds of it, the takeaways. My point today is to try to hit the high level things for the takeaways only. There are two things that were recently repealed in Vermont. The eightytwenty rule and the throwback rule. The takeaways for that, so that you're aware about how corporate income tax works in Vermont. Number one, Vermont does not exclude overseas corporations from apportionment, which is something that we mentioned a minute ago also. The eightytwenty rule had to do with that, but we don't follow that anymore. So when it comes to the whole pool of income that gets apportioned, some of that is going to be overseas income, potentially. The other thing that you should be aware of is that when a sale originates in Vermont, but the state in which the sale is made does not tax the income, that is, the sale is being made from Vermont in the same New Hampshire. New Hampshire is not the best example because they have business entity tax. I'm going to say Florida. There's no income tax being apportioned there. There is something called a throwback rule in which a state might try to tax that thing. Well it originated here and no one is taxing it, so we will tax it. Vermont does not do that anymore. It used to, but does not.

[Edward "Teddy" Waszazak (Member)]: Do we know what changed? When and why did they change?

[Kirby (Legislative Counsel)]: Both of those were Act 48, right?

[Emilie Kornheiser (Chair)]: Fair. Nope. It was all sort of the changes to corporate tax. We made it before Kirby's time. Before my

[Kirby (Legislative Counsel)]: time in the position, yeah.

[Emilie Kornheiser (Chair)]: Not before your time. Or even your time working on tax policy.

[Kirby (Legislative Counsel)]: Not before.

[Carol Ode (Member)]: Before your time in the chair.

[Emilie Kornheiser (Chair)]: We did everything at the same time, and some things increased total revenue, some things decreased our total revenue in a comprehensive package, and tried to really focus on consistency, reducing tax avoidance, fairness. Representative Masland, do you remember what we were doing?

[James Masland (Member)]: I am talking specifically to that. Wait. In in weighted means, we were looking at the various types of ways that we might tax or not tax. One of the things that we tried to do fairly consistently was have the net balance being increased taxes to Vermont to and particularly such that it would encourage businesses to locate here. And that turned out to be a mantra that we tried to follow and still do. We wanna have businesses look at our tax codes and see that they'd be better off here than somewhere else. I'm sure that'll continue.

[Emilie Kornheiser (Chair)]: I I would say I think that that was, like, a real high value for a lot of members of the committee. I personally don't think that corporations or people choose to locate or unlocate somewhere based on that state's tax code. But is one of the factors, and that is something that was really important to a lot of people.

[James Masland (Member)]: They make decisions. Yeah, totally.

[Carol Ode (Member)]: I think we also wanted to make sure our corporations were not paying more than out of state appropriations. So

[Patrick Chittenden (Joint Fiscal Office)]: I think that is the takeaway.

[Kirby (Legislative Counsel)]: All these changes are within the same theme. All of these things, in different ways, move away from thinking of it in terms of corporations in Vermont being responsible for corporate income tax in Vermont. It really is about corporations, many of them elsewhere, making sales into Vermont. That's all I have.

[Emilie Kornheiser (Chair)]: Thanks for a week.

[Patrick Chittenden (Joint Fiscal Office)]: No. Still show you some tiredness.

[Carol Ode (Member)]: Sorry.

[Kirby (Legislative Counsel)]: I don't actually know if he has not a great

[Emilie Kornheiser (Chair)]: I feel like without Joyce Finnegan is no fun anymore.

[Patrick Chittenden (Joint Fiscal Office)]: We could talk about Joyce Finnegan. I was

[Unidentified Committee Member]: gonna say, was it Joyce Finnegan or was Joyce

[Patrick Chittenden (Joint Fiscal Office)]: Ann Finnegan? It was Ann Finnegan. It's a common. So Joyce was my grandmother, James, so

[Kirby (Legislative Counsel)]: Yeah.

[Patrick Chittenden (Joint Fiscal Office)]: She's kind of sad.

[James Masland (Member)]: Ah, the floor is yours. Okay.

[Edward "Teddy" Waszazak (Member)]: Whenever you want it.

[Patrick Chittenden (Joint Fiscal Office)]: For anyone who doesn't know me, I am trying to get my PowerPoint to work. I'm also Patrick Chittenden of the Joint Fiscal Office. So yeah, as the chair mentioned, we're going to take a couple of steps back here. But I do want to touch on a couple of things, just I think repetition in terms of how we think about corporate income tax is really important because it's very complex. But again, so like Kirby was talking about, Vermont, like the federal government treats taxes on net income slash profit, they actually use the federal definition for what that income is. And we'll again sort of see something we saw on Tuesday against today on how that sort of all adds up and then subtracts out to get to those definitions. Again, there's sort of two characterizations to sort of what a business is and how they're treated from a tax perspective. There's corporations and they're subject to the corporate income tax, which is what we're talking about today. And then there's all those pass through businesses, the LLCs, partnerships, S corps, what have you. Of course, as Kirby mentioned, LLCs have that option to elect. For these pass through entities, the profits are divided amongst the shareholders based on their ownership percentage, and they actually claim those against their personal income taxes. So kind of not what we're talking about today, really. If you were to change corporate rates, these pass through entities would just not be bothered by it unless it's an LLC opting to be taxed in that way. Oh, yeah. Patrick's still trying to get my PowerPoint to open. I'll stop sharing and then start sharing again. Can we all see that? Great. So again, I'm just gonna touch on something we talked about Tuesday about how we get to net income. C corps are subject to the IRS Form 120. And really, again, like I said, this is how we get to the starting point for Vermont corporate taxes. It's very similar to the calculation of adjusted gross income for personal income taxes. We take these federally defined dollar figures and the calculations to get to those as our starting point for Vermont state taxation. So, the eleven twenty is for C Corps. Just if you're curious in looking at forms, which I've been doing a lot of recently, S corps have the eleven twenty S. LLCs file a ten sixty five if they're opting to be taxed as a pass through. And then sole proprietors, they're just entering that right into their ten forty, which is what you all fill out when you do your personal income taxes with your wages, whatever you have. Those pass throughs provide each shareholder according to their percentage of ownership, what's called a K-one, which they then take and put on their ten forty to file their taxes. So only C Corps with the couple of exceptions that Kirby talked about are going to be subject to what we're talking about today. And this is the eleven twenty. You all saw this on Tuesday. This first section here is adding all the money that's coming into the corporation up to get to that line 11, which is total income. That is not our starting point. That is really just a measure of what's coming into the corporation. They do have this long list of deductions that they're eligible to take. Remember everything we talked about on Tuesday with regards to corporations, all those things will show up in lines 12 through 27 until you get to line 28 on the form, which is our starting point. That's the federally defined net income that we use as the pre apportionment, what kind of income are we talking about.

[James Masland (Member)]: Okay.

[Edward "Teddy" Waszazak (Member)]: Can you talk about depletion? Okay,

[Patrick Chittenden (Joint Fiscal Office)]: so depletion. One example I found of that has to do with timberlands. So, as you're chopping down the woods, you're depleting the resource, so that it is therefore devaluing the value of that land that you have. There's some other examples.

[Emilie Kornheiser (Chair)]: What's that different than depreciation?

[Patrick Chittenden (Joint Fiscal Office)]: So depreciation is more typically going to relate to capital stock like a building or a durable good, like a machine.

[Emilie Kornheiser (Chair)]: If they should have sold natural stock.

[Patrick Chittenden (Joint Fiscal Office)]: I believe so, but I should double check on that. And yeah, so I had to look up bad debts, what that is, things like that. So I've been spending a lot of time with the forms and not all deductions that we've been looking at fit in the line where I would normally think they would, but there's a lot of very weedy areas of corporate income that's why the federal statute book is so thick. And per

[Edward "Teddy" Waszazak (Member)]: what necessarily would be where you think they are and things are

[Patrick Chittenden (Joint Fiscal Office)]: weedy, advertising, is that straightforward in the

[Edward "Teddy" Waszazak (Member)]: way that I'm thinking? One would think

[Patrick Chittenden (Joint Fiscal Office)]: when you say advertising, ad buys, etcetera, etcetera? I haven't looked in-depth on that particular line. Logically, that sounds like it makes sense, but

[Edward "Teddy" Waszazak (Member)]: Well, we're not talking a lot.

[Patrick Chittenden (Joint Fiscal Office)]: So, yeah, as Kirby mentioned in Vermont, so we've gotten to that starting point of the federally defined net income. We have this 8.5% marginal tax rate. I'll show you the whole bracket in a minute. It's a marginal rate above $25,000 in that income that's allocated to Vermont. It's all going to be part of that unitary group that Kirby was talking about. So, if a subsidiary sells into Vermont, They have nexus here. It's going to pull on the entire unitary group, which is sort of part of that choice conversation as well. So pre to 2023, and this is the act that Kirby was talking about, we actually had a three factor formula based on payroll, property and sales taxes. So, if you were only selling into the market, your weights for payroll and property would essentially be zero, right? Because you don't have really a physical presence here, but you're still selling in. But by having the weights on that be zero, you'd be getting a sort of discount when you compare it to a single sales factor. So, and beginning in 2023, that's when we made the shift to the single sales factor. I got a couple of, I guess they're kind of diagrams that help sort of illustrate that point. But one little nugget that I always find very interesting is that firms with zero taxable income make up roughly 70% of returns. And so those are the ones that are going to be subject to the minimum tax, which is that even if your net income is zero or below, but you've got gross receipts into the state of Vermont, you're still going to have to owe some kind of taxes based on that schedule. So again, Vermont uses The US definition for taxable income for unitary groups within The US. C Corps taxable income is apportioned to Vermont, and that's where the single sales factor comes in. And I will admit, I stole this graphic from a presentation Will Baker gave in here a couple of years ago because I thought it was very cleanly done. But this circled in red here, that is from the line 28 on the eleven twenty form that I was talking about earlier. So that is the starting point. And then the second little division equation here in middle here, that's where you get into figuring out what percentage of the unitary group's overall net income is actually apportioned to Vermont. It's really just kind of this sort of pro form a example I have here. The first two examples, example one and example two, are sort of the two extreme ends of the spectrum. Both corporations have $1,000 in federal taxable income. This first one here has none of those sales going into the Vermont market, but they've 5,000 in sales overall. Their apportionment to Vermont is zero. They're actually not even going be paying minimum tax because their sales to the Vermont, there are no gross receipts here in this example. The second example, Corporation B, same federal taxable income, but they're only selling to the Vermont market and nowhere else. So really here, it's just a thousand times one, their entire net income is apportionable to Vermont and will be fully subject to Vermont corporate income tax. And then example three is really just the middle of the road example. Half their sales are into Vermont, half their sales go to other states. So, half of their taxable income is going to be apportioned to and subject to Vermont corporate income tax.

[Edward "Teddy" Waszazak (Member)]: Example one, would they file a tax return at all in Vermont?

[Patrick Chittenden (Joint Fiscal Office)]: That's a good question. So another thing I find interesting is Vermont gets a lot of zero apportionment, zero net income returns. So, I think that a lot of corporations just fill out a form for all 50 states just to cover their bases and have the documentation there. So they don't have to, but a lot of them actually end up doing it. I think it's just to cover their bases.

[Emilie Kornheiser (Chair)]: One, we can have Taks in to talk a little bit more about some of this piece of the puzzle, if that's helpful. And the CPAs Association is having a lunch on the twenty second, which I imagine everyone got an email for. But it would be I know some of us have very close relationships with accountants, but it's nice

[Carol Ode (Member)]: if all of us have

[Emilie Kornheiser (Chair)]: a more professional relationship with accountants.

[Carol Ode (Member)]: Maybe married

[Edward "Teddy" Waszazak (Member)]: to one. Maybe married to

[Emilie Kornheiser (Chair)]: So just because we don't often spend time on the scale of forms in this particular way, and it's really helpful for us to be talking in this way. So I appreciate your digging, Pat. Thank you.

[Patrick Chittenden (Joint Fiscal Office)]: So before I move on, this is just sort of the torn down to its essence explanation of how the apportionment factor in the single sales factor in Vermont works. And so a really important bullet I have here is that these are just completely agnostic as to where you're located. If you assume Corporation A is in Vermont, I think the hypothetical on Tuesday was we have one in Oklahoma and Arkansas. They're all being treated very identically with this type of treatment.

[Carol Ode (Member)]: I ask a quick question about where you go to look for data? So I had someone reach out to me, constituent or Doug, the other day, say, I would like to know how much apps end up pays and follow-up, for example. Where would you go to find their eleven twenty? And where would you go to figure out how much of their sales actually happened in Vermont versus other places?

[Patrick Chittenden (Joint Fiscal Office)]: Okay, so I think there's kind of two things there. So I think there's a distinction probably to make between Well, sorry, let me back up again. So I would never have access to Amazon's Vermont corporate income tax return. The reason for that is it's kind of like an individual taxpayer on their personal income. It's sort of personal identifiable information. I would presume, and I don't actually often look at this on an individual entity level typically, presumably their quarterly filings will include line items for things like taxes paid. I don't know that for sure. I'm sure you can get that from the SEC, for example.

[Carol Ode (Member)]: Yeah, 10 ks and 10 Qs will have their accounting income, which should be very different than their taxable income for lots of various reasons. That's where I got hung up because I thought, well, know where to

[Patrick Chittenden (Joint Fiscal Office)]: go to find a 10

[Carol Ode (Member)]: ks or 10 Q, but actual tax information is trickier. Because you can find a tax that they paid, the question is what was the basis on which that tax was paid? And that might not match what's in the net income on their 10 ks, for example.

[Patrick Chittenden (Joint Fiscal Office)]: Sure. And part of what makes that also a little bit complicated is most corporations are paying their taxes on a quarterly basis in what they're called estimated payments. So, they'll be paying their taxes in real time and they wait until end of the year or end of their quarter to true up. One thing that a lot of them end up doing is if they're owed money, they'll take a cash refund or they can actually carry that forward towards future liabilities to whatever governmental entity they're having to pay the taxes to. But yeah, again, I don't really work on it on an entity by entity basis. It's a good question. A lot of times, there's a real dearth of information available. I don't know if anyone outside of maybe the tax department, but not even them, probably the IRS has access to this sort of What did Amazon claim in business interest deduction? They'll publish aggregate

[Emilie Kornheiser (Chair)]: It's protected. It's very, very, very protected data by the government.

[Carol Ode (Member)]: Sorry to take a soft crack. No, no, no,

[Emilie Kornheiser (Chair)]: it's a really important question. It makes some of this work really hard because for a good reason. A lot of folks don't trust government with their information. So tax information being particularly sensitive, have all these protections built around it, but it makes it really hard for us to understand some of the impacts of what we're doing.

[Carol Ode (Member)]: So Amazon could have my data, but I can't have theirs. Yes.

[Emilie Kornheiser (Chair)]: I mean, they don't have your tax data, though. Mean, they might have.

[Patrick Chittenden (Joint Fiscal Office)]: I'll get your taxes done on Amazon.

[Edward "Teddy" Waszazak (Member)]: I'll deal with it.

[James Masland (Member)]: It's back

[Patrick Chittenden (Joint Fiscal Office)]: to you. Okay. So we talked about the determination of Vermont taxable income and then going through the apportionment. This is what it eventually feeds into. We have the marginal tax rates here. You can see the bands for corporate taxes in Vermont are very narrow, goes from zero to 10,000, 10,000, 25,000, and then 25,000 and up, with that top rate being 8.5%. Effectively, especially for Vermont's big corporate tax players, their effective tax rate is about as close to 8.5% as you can get. And I will say that it's the few very large corporations that do predominantly end up paying most of Vermont's corporate income taxes. And so again, their effective rate's gonna likely be much closer to that 8.5 than anything you see below it because those bands are pretty narrow overall. And again, because we have a lot of zero or negative income filers in Vermont, what they end up actually having to pay in terms of minimum tax, can see in that second table just below. So if they have $500,000 or less in gross receipts, it's just $100 in minimum tax for those entities.

[Edward "Teddy" Waszazak (Member)]: Acknowledging what we just talked about with protecting information, do we know how many corporations, c corps pay these different tax rates? Like, do we know how many c corps are being charged at zero to 10,000, etcetera?

[Patrick Chittenden (Joint Fiscal Office)]: Oh, I've got some I might be able to get it updated, but I have at least some older information that I can dig up from a couple years ago and share that with you.

[Unidentified Committee Member]: Even though it's no longer in effect, that that is our eighty twenty rule at work, which is I think we did it. 20% of the corporations.

[Patrick Chittenden (Joint Fiscal Office)]: I remember. I think it was post single sales factor and all those other changes, but I I I have to double check that. And it could be something that the tax department might be

[Kirby (Legislative Counsel)]: able to update for me.

[Carol Ode (Member)]: I would find that interesting too.

[Patrick Chittenden (Joint Fiscal Office)]: Sure. Yeah, I'll reach out. So that was mechanics. Next, I was going to talk about just what corporate income taxes mean to the state of Vermont in terms of the budget. So the July 2025 and I know we're getting an update tomorrow, current forecast

[Edward "Teddy" Waszazak (Member)]: Next Friday.

[Patrick Chittenden (Joint Fiscal Office)]: Next Friday, thank you.

[Emilie Kornheiser (Chair)]: Did earlier, like, just an hour ago, did that exact same. Anyway, weird.

[Patrick Chittenden (Joint Fiscal Office)]: So the July forecast, they were forecasting about $240,000,000 in corporate income tax revenue for fiscal year twenty six, the one we are currently in, which sort of shakes out to being about 10% of overall general fund available revenue. For context, personal income taxes make up about, I think it's 55% of total general fund revenue. Again, this is the second most important revenue source that we have for the general fund, if you don't include healthcare revenues. So it's a very large chunk of general fund revenue, which we use for almost everything except for areas.

[Emilie Kornheiser (Chair)]: There's nobody. Pat, you can always finish your sentence.

[Carol Ode (Member)]: So my top of this

[Edward "Teddy" Waszazak (Member)]: question.

[Carol Ode (Member)]: This 65% is personal income tax opposed of the general fund, makes up 55% of, personal income tax makes up 55% of the general revenue? Approximately. So do you have statistics on how many of those who are paying personal income tax are any double income households where they, and there's one question, how many of them are

[Patrick Chittenden (Joint Fiscal Office)]: in single

[Carol Ode (Member)]: income households, and in both those cases, how many of them have children, and how many of them are making above the cutoff of 175 that we have for giving help to people who

[Edward "Teddy" Waszazak (Member)]: are Child tax credits?

[Patrick Chittenden (Joint Fiscal Office)]: So, double income, single income, with kids?

[Carol Ode (Member)]: Either one of those. Anybody who has kids, double or single income.

[Patrick Chittenden (Joint Fiscal Office)]: I saw it.

[Carol Ode (Member)]: And I don't know if you heard this, but we've seen a trending trend of double income family since we enacted a child tax credit, going from a double income to a single income family when they're above the 175.

[Patrick Chittenden (Joint Fiscal Office)]: So I can get some single year snapshots for that. I think the truth is for looking at something like a trend. It hasn't been around long enough for something like that to have any statistical significance to it. One thing that is on the JFO website is a year or two ago, after the first year of the child tax credit was enacted, there's an issue brief on there that talks about number of kids, number of claimants, which would be the number of households. And a couple other things, including overlaps with other state credits like the EICC and child dependent care credits. So I can send that to maybe Sorsha or directly to you if you want. Sorsha. I'll send it to Sorsha.

[Emilie Kornheiser (Chair)]: The brief, because I ended up- The issue brief, yeah.

[Carol Ode (Member)]: I'm concerned about people who don't qualify for the child tax credit.

[Emilie Kornheiser (Chair)]: Representative Ode? Yeah. I appreciate that, and we're talking about corporate income right now.

[Carol Ode (Member)]: We're in the general fund, but that's fine.

[Emilie Kornheiser (Chair)]: Okay.

[Carol Ode (Member)]: I've decided on that.

[Emilie Kornheiser (Chair)]: Let's go back to corporate income, because you're on personal income.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, so the last thing I'll say about personal income for right now is that it's been holding pretty steady up against the forecast, so there hasn't been any concerns in that area.

[Emilie Kornheiser (Chair)]: After the e board meeting, we'll do lots of

[Patrick Chittenden (Joint Fiscal Office)]: political presentations about that. Tom will have lots to say about it.

[Emilie Kornheiser (Chair)]: All of it. It'll be the standard post e board revenue conversation. Yes. So

[Patrick Chittenden (Joint Fiscal Office)]: yeah, it's about 10% of forecasted general fund revenue for fiscal year 'twenty six. Just a little perspective, last year corporate tax revenue was approximately $272,000,000 So, this year's forecast did represent about a 12% decrease in total revenue from the source. I will say September, had a very large one time event. Usually a one time event surround mergers and acquisitions or what have you. So

[Edward "Teddy" Waszazak (Member)]: if

[Patrick Chittenden (Joint Fiscal Office)]: you were to strip that out and just talk about the baseline, it doesn't look as scary as a $30,000,000 drop right now in terms of what's going on. Sorry, for half

[Emilie Kornheiser (Chair)]: a represent what's that?

[Edward "Teddy" Waszazak (Member)]: Half a month section.

[Patrick Chittenden (Joint Fiscal Office)]: Oh, so I don't Again, that's sort of the private information that I'm Oh, You would

[Kirby (Legislative Counsel)]: be employed if there's something

[Patrick Chittenden (Joint Fiscal Office)]: No, Tom Covet does have access to that sort of information, so in very vague terms, he'll tell me things like a one time event, stuff like that. The July forecast had that initial decrease from the prior year for income taxes, but if you look at the chart, it does show gradual, steady growth moving forward. I will say in the first six months of fiscal year twenty six, corporate income tax revenue has been below the July consensus forecast by about $25,000,000 Corporate income tax revenues are my understanding and given my conversations with the state economists, below target largely due to refunding activity that happened in November and December. If you remember, I don't if it was ten minutes ago or whatever, we were talking about how corporations account for the taxes that they are paying. Usually, when they are eligible for a refund, they can either take the cash or defer it and roll it forward. It's called carryforward and apply it to future liability. In this instance, some of the larger players have been opting to receive those refunds in cash rather than to defer them moving forward. Again, that's something Tom has very specifically been looking at for the forecast to be getting next Friday. And yeah, so I think that's one thing to keep an eye on certainly, and maybe something to pay attention to in terms of whether it's maybe a little more systemic or is due to some discrete events that have occurred amongst a smaller cohort of these taxpayers. And yeah, so corporate income tax revenue is still seen to, moving forward, probably account for about 10% of general fund revenue, still to be a very important component of the general fund in future years. And I have a chart here, which shows historically what corporate income tax collections have looked like in the state of Vermont. You'd see a lot of very steady growth. And then right around when the pandemic occurred, we see the spike here actually. So in that time period, corporate income revenue went from about 7.5% of the general fund to, and jumped at its peak, and it looks like fiscal year 'twenty three, to about 12.6% of the general fund. Last year, I think it was about 11%. We're back down to forecasted about 10% of general fund revenue. But one thing I wanna show you here is a lot of peaks and valleys in this sort of progression. And actually, why don't I show you this next slide here? Because this shows you from year to year how much corporate income tax jumps around. It's a very volatile tax type. And so just what this chart is telling you here is on the left, you'd have percent change from the year prior, and then just on the bottom of the fiscal year. So anything below that line shows a decrease from the year prior, anything above, it's an increase. And it's very spiky. It's very lumpy. It's really difficult to look at from a month to month basis, because typically it either all comes in at once or all goes out at once. And so, I guess really what I want to hammer home with this graphic here is that it's a very volatile tax type.

[Edward "Teddy" Waszazak (Member)]: And when you say corporate income tax collection in terms of this

[James Masland (Member)]: chart, this is dollars collected, not tax returns filed.

[Patrick Chittenden (Joint Fiscal Office)]: Dollars, yeah.

[Emilie Kornheiser (Chair)]: Percent change in dollars.

[Edward "Teddy" Waszazak (Member)]: In dollars, yeah.

[Emilie Kornheiser (Chair)]: Can you go back to the other big picture?

[Unidentified Committee Member]: So single sales factors 2023. It

[Edward "Teddy" Waszazak (Member)]: was also the

[Emilie Kornheiser (Chair)]: pandemic has a lot going on here.

[James Masland (Member)]: Feeding a lot of, yeah.

[Unidentified Committee Member]: Which is what sustains, mean, extensively, you'd say there was a shift in who was paying the corporate tax for the adoption of single sales factor, although we're not comparing names as to who's on my shoulder and who found on the sheet.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, well, The US economy in general is a very consumer based economy. People had a lot of money that was coming in. Household savings really went up a lot. People were buying a lot of stuff during that time. So that helped with corporate profitability. They had a lot of customers who were able to spend money. Of course, true for all industries. Tourism, entertainment, obviously not coming out of that in the best of places, but people had money to spend and not, especially with quarantine, there's

[Kirby (Legislative Counsel)]: not a whole lot else to do. So

[Patrick Chittenden (Joint Fiscal Office)]: that is probably part of the spending spike you see during that time period that led to a lot of that profitability.

[Unidentified Committee Member]: The overlaid sales tax on the same graph, were they parallel?

[Patrick Chittenden (Joint Fiscal Office)]: I doubt it would be as spiky, and part of the reason is, well, a portion of the reason has to do with how many exemptions we have on sales tax items, particularly things like groceries, basic necessity type items. But people might have been buying a lot more TVs, what have you, just items like that that are subject to it. Sourdough starters.

[Edward "Teddy" Waszazak (Member)]: That's right.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah. So very spiky, very lumpy, very volatile. And when comparing Vermont's tax policy around corporate income tax to other states, 44 other states have the corporate income tax. 15 of these, including Vermont, have brackets, so different marginal rates based on the amount of net income you have. And then just the remainder have a flat tax. And apportionment factors and determination of net income across states differ. I will say Vermont's coupling to the federal definition of what net income is does simplify a lot of things in terms of administration. You look at a state like California, much bigger Department of Revenue over there, much more complicated forms, but they have the staff to really implement all of that. So that's a state that I do look at sometimes and say, well, they've kind of created their own sort of tax code, right? And they don't rely on the simplicity of linking up to the federal tax code in a lot of ways, and that's policy decisions, right? So, yeah, if we look at Vermont's top corporate rate, it starts at 25,000 of net income. And then I have California, Delaware, Illinois, Minnesota. I have their rate Their brackets don't line up the same. But if you look at 25,000 of net income, these are the states that have higher top marginal rates than Vermont. And then there's a chart that you can also look at to look at all the other top marginal rates that will add. Top marginal rates do not tell the full story. Yeah, I like to include this, just look at corporate profits nationally. Again, this is similar to what you saw in the slide about tax collections. One thing I will note is that you see this run up, the spike in this particular chart about a year or two prior to when you see it in our tax collections. Oftentimes, taxes take a little bit more time to flow through compared to when the profitability is sort of with the shareholder quarterly financial reporting that the corporations have. It's not too dissimilar to you earn your income in 2025 and file your taxes in 2026, but it typically ends

[Kirby (Legislative Counsel)]: up being a

[Patrick Chittenden (Joint Fiscal Office)]: little bit longer of a process of sorting all that out with all the complexities. Patrick, when do the corporations file their taxes? Have So they have their own fiscal years often, right? They will have the usual April 15 deadline that personal income tax filers pay. However, it comes back to the question of, do we want the cash refund or carry that forward? So, it's a little bit more of a rolling basis than you would think about for your typical personal income tax filer. So it's but there are there's four months that we look into usually each year, which is when estimated payments are due in Vermont. I believe December was actually one of them, so a large portion of those estimated payments coming in that month. So it's a little bit more of a rolling basis, especially for the large payers, probably less so for smaller corporations.

[Edward "Teddy" Waszazak (Member)]: Perhaps I was gonna ask a multi chart question. On the last two charts that we have from Fred, from '22 to '24, you have corporate profits going up and you have federal corporate tax collections both increasing. But then if you go back to the scary blue chart of percentage in corporate income tax collections in Vermont from '22 to '24, that dramatically decreased. Is that due to the amount of sales that were happening in Vermont, or is that a product of a portion of that? Federal tax collections are going up, corporate profits are going up, but we collected significantly less.

[Patrick Chittenden (Joint Fiscal Office)]: So there could be a couple of different things going on there. One thing is the Feds don't have to worry about apportionment, obviously, so there's not going to be any change in terms of when single sales factor comes in. And honestly, not just single sales factor, but the other corporate tax law changes that were made in Vermont at the time, too, like Carolyn mentioned, the throwback repeal, the eightytwenty rule, so that shipped over to Joyce. So there's definitely That could definitely be a portion of it, but also, the national market is not the Vermont market. It's not a mirror image, I guess, is kind of what I'd say to that. Yeah. I guess that I you

[Edward "Teddy" Waszazak (Member)]: know, coincidence is the wrong word, but it's just interesting to me that ACT 108 went to effect in 2022, and we have a mirror, look, mirror images, curious to add more to that.

[Patrick Chittenden (Joint Fiscal Office)]: Yeah, mean, a part of that could come down to sometimes the split between what types of goods or services different states are consuming more of than any given point in time. Vermont is an older state. We do tend to consume more services on a per capita basis than some other states do. So it can kind of the industry mix that is important to a particular state can change as well. So I have in the next few slides the tax law changes from 2022, which I know Kirby went over, but we can go over again if you'd like. That's helpful, please. Yes. Okay. So these are the five things that were in that bill 01/1948. So you had the repeal of the eightytwenty language, the shift to single sales factor, the Joyce Definagan methodology, the throwback rule repeal, and the minimum corporate tax, that schedule we saw earlier. Again, the repeal of the eightytwenty rule previously, if a C Corp had a subsidiary whose primary source of sales came from overseas, defined as that 80% of total sales or more, it was excluded from the sales of the parent C Corp. So Act 148 repealed that language, which said, even if you're 81%, 82% of your sales are happening overseas, we're still going to include you in the unitary group when we're thinking about what your total sales and what your total net income is. The single sales factor, we talked about, we don't care about your payroll, don't care about your property. We only care about what you're selling into the state of Vermont in the context of your overall sales. The Joyce Definagan methodology, so Vermont, we previously used Joyce, which limited a C Corp's nexus to Vermont only to the subsidiaries that had a nexus in Vermont. And when you think about nexus, there's two types. There's a physical, you have a physical imprint or footprint in the state. There's also something called an economic nexus, which I think the threshold for triggering that is like 100,000 in sales or 200 individual transactions, something like that. So, if you had a subsidiary that broke either of those thresholds, the entire unitary group would pull them. And yeah, so this change also is something that's affecting the apportionment formula for corporations because of parts of their unitary group they need to be including in the determination of sales and net income. The throwback rule repeal. So previously, as Kirby said, if a C Corp sold into a state, which had no nexus and therefore no taxability, it was required to count those sales as Vermont sales. And I have a chart from the time that this was all done showing how it was not the most significant of the changes made. I think part of the dynamic that changed a little bit about this does actually tie back to the Wayfair Rule, which previously it had been very tied to if you have a physical nexus to a state, Supreme Court decision did say, Well, you don't actually have to have employees or a warehouse here. If you sell into the state enough, you have nexus, they can tax you, or with regards to sales tax as well. Okay. And the last change was those minimum corporate taxes. This is that same schedule again. Yeah. So this actually happened in my first session here Graham Campbell was the one working on it and I remember the way he sort of talked about it, it less so a It was more of a modernization of Vermont corporate income taxes. A lot of these things, a lot of these changes were actions that a lot of other states were sort of embarking on around the same time. And you can see here that it was ultimately sort of designed to be sort

[James Masland (Member)]: of a net neutral shift

[Patrick Chittenden (Joint Fiscal Office)]: in terms of total tax collection. It wasn't meant to really raise taxes, but sort of change the treatment of corporations in Vermont. And I think I heard some of the discussion about why some of those changes were done earlier, so don't need to rehash all the things. No, that's helpful. Thank you. And then just questions.

[Emilie Kornheiser (Chair)]: Do you have a question?

[Patrick Chittenden (Joint Fiscal Office)]: I do. Cool. Aside from

[Unidentified Committee Member]: what Teddy was asking about how many corporations representative was, how many corporations fit within those different categories, how big of a base are we talking about the number of corporations you file? Total?

[Patrick Chittenden (Joint Fiscal Office)]: Do you have a I don't have the number off the top of my head, but I can can

[Unidentified Committee Member]: get that. 49. This is 149.

[Patrick Chittenden (Joint Fiscal Office)]: And you want the number of CIT filers?

[Kirby (Legislative Counsel)]: That would be that would be good to know. I mean,

[Unidentified Committee Member]: I should have started. Yeah, I have no idea.

[Patrick Chittenden (Joint Fiscal Office)]: And at the time that we looked at it last, that was where that 70% were reporting zero or negative came from at the time.

[Edward "Teddy" Waszazak (Member)]: Just piggybacking off of that, think it would be interesting how many filings are there, which buckets are they falling into in terms of minimum taxation, which bracket they're in, etcetera. As much of that is I

[Emilie Kornheiser (Chair)]: will say at the time that we passed the minimum tax, there were 10 tax filers that fell into the highest bracket.

[Unidentified Committee Member]: The 300,000,000 or more.

[Edward "Teddy" Waszazak (Member)]: Yes, that's right.

[Emilie Kornheiser (Chair)]: That's the only number from all of the psychologists here. Any other questions? Okay. That was a lot to digest, folks. We are done for the day. Enjoy the floor. See you back here tomorrow at nine. One of our colleagues will be here presenting a bill