Internal Information Quality and State Tax Planning*

Abstract

This study examines the association between internal information quality and state tax planning. Prior literature documents a positive association between internal information quality and summary measures of tax avoidance. However, we know little about specific forms of tax planning and internal information quality. State tax planning is difficult because of the number of jurisdictions, variety of tax rules, variation of enforcement, and apportionment requirements. We find that internal information quality facilitates state tax planning and is most important when firms face more restrictive state tax laws and when domestic firms relative to multinational firms have international income shifting opportunities. Our results provide a baseline of the economic effects of internal information quality on different forms of tax planning. Understanding internal information quality's role in state tax planning is especially relevant as countries propose to modify international tax rules to mirror the state taxation format of a singleentity system with apportionment.

Internal Information Quality and Corporate Employment Decisions

“…First, we extend the literature on the effects of IIQ. Prior research documents that higher IIQ is associated with a higher sensitivity of investment to internal profit signals (Heitzman and Huang 2019), more patents and patent citations (Huang et al 2020), lower work-related injury rates (Hope et al 2022), lower cash holdings (Xiong et al 2021) and tax plans (Gallemore and Labro 2015;McGuire et al 2018;Laplante et al 2021). Our study highlights the role of IIQ in corporate employment, another crucial determinant of a firm's competitive success.…”

“…2018; Laplante et al. 2021). Our study highlights the role of IIQ in corporate employment, another crucial determinant of a firm's competitive success 4.…”

“…Applying a similar logic to state tax planning, Laplante et al. (2021) find that high IIQ is associated with lower state effective tax rates. Similarly, McGuire et al.…”

Tax Planning in Companies in the Commercial Sector: A Literature Review

“…This argument is also consistent with the professional literature that emphasizes the importance of integrating the tax function with other business units. The quality of internal information facilitates tax planning and is more important when firms face more restrictive conditions (Laplante et al, 2021).…”