The Association between Internal Information Quality and State Tax Planning

Abstract

This study examines if internal information quality facilitates state tax planning. Due to the considerable number of tax jurisdictions, variety of tax rules, and enforcement mechanisms, state taxes are one of the most complex areas for tax planning. Prior literature finds that internal information quality is positively associated with summary measures of tax planning. However, we know little about what specific forms of tax planning drive this association. We conjecture that the complex area of state tax planning is one of the forms of tax planning that benefits from strong internal information quality. Consistent with this conjecture, we find that higher internal information quality is positively associated with state tax planning. We also find that domestic firms drive this relation, consistent with multinational firms focusing more on international tax planning. Finally, using a structural equation model that allows different forms of tax planning to covary with each other, we find a positive association between higher levels of internal information quality and both state and foreign tax planning. We fail to find a significant association between internal information quality and federal tax planning. Taken together, our results imply that internal information quality is most important for complex, multi-jurisdictional areas of tax planning.