One Company Leaving Memphis May Explain Gaping Hole In Tennessee’s Budget

McKesson, which is based in San Francisco, recently moved its national distribution hub for pharmaceuticals from Tennessee to Mississippi. Credit: Wikimedia Commons

Tennessee finance officials say they’re spending the summer trying to figure out why business taxes have continued to drop even as the economy improves. One explanation may lie with a giant corporation that left the state.

The Haslam Administration has blamed loopholes in the tax code, suggesting accountants have gotten more creative, resulting in a $222 million deficit in business tax collections since August compared to budgeted estimates.

“I think if there were a loop hole of that significance out there, I’d know about it,” says Brett Carter, a tax attorney with Bradley Arant Boult Cummings who has been investigating other possible causes.

Only about 100 companies pay much in franchise and excise taxes, and they’re the kind of firms that are pretty easy to keep tabs on. So Carter says it shouldn’t take more than a few days to figure out what’s going on.

Here’s his theory (originally published in State Tax Notes).

In 2012, McKesson moved its pharmaceutical distribution hub from Memphis to Olive Branch, Miss., where the state legislature recently passed more pharmaceutical-friendly tax policies.

It’s not that McKesson necessarily had such a big tax bill, though it is one of the largest health care services companies in the country. It’s that the untold numbers of drug-makers selling medicine through McKesson were getting hit with big tax bills too.

Several firms sued, arguing they shouldn’t be subject to Tennessee’s business tax. One company – Allegran Inc. – wanted millions in refunds.

“You then start extrapolating the numbers, and there’s at least some indication a significant part of the shortage is probably attributable to the fact that McKesson is no longer in Memphis,” Carter says.

Off-the-record, state officials have acknowledged the potential impact of McKesson’s move. But citing confidentiality requirements, they say they can’t discuss particulars.

UT economist Bill Fox points out that business taxes have always been volatile, including a period during the recession when collections were way up for similarly unexplained reasons.