Markell signs corporate tax reform act into law

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legislative-hallGov. Jack  Markell has signed the Delaware Competes Act (HB 235) into law.

The law changes the way corporate income tax is calculated and modifies filing requirements that viewed as burdensome to small businesses.  Sponsored by the leadership of both parties, the legislation was overwhelmingly approved by the General Assembly.

A few dissenters said the measure amounted a subsidy for big companies and would widen the state’s structural budget deficit in coming years.

The legislation is designed to keep employers in the state and modernize the corporate tax system that has already been modified by many states.

It is widely believed that the speed of the bill’s passage was part of an effort to keep DuPont spin-off Chemours in Delaware. The company has been shopping nearby states for headquarters locations.  Approval of such legislation often comes at the end of the session.

“This reform to our tax code puts Delaware in a stronger position to retain jobs and to encourage employment growth in the years to come,” said Markell. “I applaud the General Assembly for recognizing the value of this legislation and for working quickly and in a bipartisan way to send it to my desk.”

The Delaware Competes Act, which supports a recommendation identified by the DEFAC Revenue Review Task Force  Markell established through Executive Order 47, changes the way Delaware apportions income tax for corporations to remove elements of the code that are viewed as hostile to new investment and job creation.

Previously, three factors were used to determine what portion of a company’s total income is attributed to Delaware for tax purposes – payroll in Delaware, property holdings in Delaware, and total sales in Delaware. As a result of the new law, only sales will be factored into the calculation, meaning companies will not be penalized for adding payroll and property in the state. Delaware joins Pennsylvania, New Jersey, and New York, among the many states that have taken similar actions.

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 House Majority Leader Valerie Longhurst (D-Bear), who sponsored HB 235. “I’m pleased that leaders on both sides of the aisle came together to make Delaware an even better place for businesses.”

“As a prime sponsor of the bill, I believe the Delaware Competes Act will reform our corporate income tax calculation, remove a disincentive for job creation, and make us more competitive with other states,” said House Minority Leader Danny Short (R-Seaford). “It is a positive step towards improving Delaware’s business climate.”

“While there is still work to be done, this is a step closer to making Delaware more business friendly,” said Senator Gerald W. Hocker (R–Ocean View).

HB 235 also makes several changes to simplify the filing process for small businesses and reduces the likelihood of penalties for tax filing errors.

“Under the old system, our small and family-run businesses were forced to play a guessing game with their Corporate Income Taxes, which was a huge burden on them,” said Rep. Bryon Short (D-Brandywine Hundred). “This really is a win-win for Delaware. By modernizing our system, we are supporting the small businesses that are the backbone of our economy, while the state still receives its revenue.”

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 – raising the threshold at which companies qualify for this safe harbor and indexing it to 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.

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