Governor Signs Delaware Competes Act

Reforms Corporate Tax System to Support Job Creation

Dover, DE – Governor Markell, joined by a bipartisan group of legislative leaders, signed the Delaware Competes Act (HB 235) into law today, changing the way corporate income tax is calculated to ensure companies don’t pay more for decisions to hire and expand in the state, and to modify filing requirements that were overly burdensome to small businesses.  Sponsored by the leadership of both the Democratic and Republican parties of the House and Senate, the legislation received near-unanimous approval from the General Assembly earlier this month.

“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 Governor Markell, who was a lead supporter of the bill when it was introduced and highlighted its importance last week in his State of the State Address.  “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 the Governor established through Executive Order 47, changes the way Delaware apportions income tax for corporations to remove elements of the code that are disincentives for 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.”

“This forward-thinking, bi-partisan effort is the latest example of our collective commitment to growing our economy,” said Senate President Pro Tempore Patricia Blevins (D-Elsmere). “In a rapidly transforming economy, we must be quick to take action that keeps jobs here in Delaware and sets us up for future growth, and the Delaware Competes Act is an important step in that direction.”

“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.”

“Delaware has a lot to offer employers and employees,” said Senate Minority Whip Greg Lavelle, (R-Sharpley), a prime sponsor. “The key is to remain competitive and the Delaware Competes Act helps to accomplish that goal.”

“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).

Supporting Small Businesses

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.