Can a Financial Statement Pronouncement Increase State Tax Compliance and Revenues? Understanding the Effect of FIN 48 on the National Nexus Program

Since 1982, 40 states and the District of Columbia have offered amnesty programs. In December 1990, the Multistate Tax Commission (MTC) established the National Nexus Program (NNP), a permanent tax amnesty program. Prior literature has focused on amnesty programs and has shown that these programs do little to increase tax revenues and compliance when increased future enforcement is absent. I examine the impact of the NNP on state corporate tax revenues. From 1991 through 2008, state corporate tax revenues are significantly lower than revenues from 1973 through 1990. Further, I find that states joining the NNP have a negative impact on state corporate tax revenues; however, the initial year impacts revenues differently than all other years.

The implementation of Financial Interpretation No. 48 (FIN 48) provides another reason for firms to disclose in the NNP. Specifically, to reduce the FIN 48 liability on financial statements, firms may disclose in the NNP. The primary purpose of FIN 48 is to increase the comparability and transparency of financial reporting of income taxes through requiring consistent recording and disclosure across firms. Although FIN 48 has been replaced with the Accounting Standard Codification 740-10, I continue to refer to FIN 48 because of familiarity. I examine whether FIN 48 resulted in an increased number of firms entering the NNP by state. I also investigate whether FIN 48 impacted the dollar amount of NNP disclosures by state. Using aggregated proprietary data obtained from the NNP and matched with hand-collected data from 1994 through 2008, I find that FIN 48 has a positive effect on the number of NNP disclosures but has no impact on the dollar amount of disclosure. Rather, for states joining the NNP, the dollar amount of disclosure tends to be driven by the states adopting combined reporting requirements. In examining publicly-traded firms on an individual case basis, I find that economic presence and voluntary compliance initiatives predominately have a negative effect on the dollar amount of disclosure while FIN 48 has an insignificant impact.