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September 21, 2007

Now O'Malley aims at Delaware corporate tax loophole

He wouldn't just raise rates on the corporate income tax. He announced today that he would ask the legislature to approve a "combined reporting" law that reduces corporations' ability to shift costs and profits across state borders to reduce taxes. The best-known recent example is Wal-Mart. The giant retailer transfers title to its stores to an affiliate in Delaware or some other outside state. Then it pays "rent" to the affiliate landlord, which it deducts from its Maryland income. Which reduces its Maryland income tax. Another well-known example is Toys R Us. The chain transferred trademarks and other intellectual property out of state, then paid "royalties" to the affiliate, which reduced in-state income.

Requiring combined reporting is a no-brainer. More than a dozen states already do. It should have been first on any governor's "to do" list of tax updates. Out-of-state tax shelters circumvent the intent of the law, and they're unfair to smaller Maryland businesses that don't have out-of-state affiliates and can't shelter income.

Here's a good description of combined reporting from Geller & Co., a New York tax firm. New York Gov. Eliot Spitzer has pushed for combined reporting in that state.

Under combined reporting, a corporate family files a single tax return covering income from all subsidiaries. The income gets apportioned among the states based on the locations of all property, payroll and sales, thereby ending income-shifting between subsidiaries. With combined reporting, corporations cannot structure transactions, such as transferring royalty and dividend income and interest expenses, between affiliates in various states to avoid tax. Combined reporting would also level the playing field for small- and medium-sized businesses operating only [in-state] that shoulder a proportionately higher share of corporate taxes because they lack the opportunity to shift income to other jurisdictions.
Posted by Jay Hancock at 12:42 PM | | Comments (6)
        

Comments

This is a no brainer. Louis Goldstein started to tackle this problem back in 1996. It finally worked its way through the courts and the Court of Appeals ruled several years ago that Maryland could tax corporations on their profits earned in Maryland and that it was illegal to transfer profits to dummy mailboxes in Delaware and Nevada. Ehrlich of course didn't want to follow through. His buddies at the Chamber of Commerce were more interested in protecting the big corporations than looking out for the small business man. Its past time to level that playing field!!

The dem have been in office for years in Md. and this is nothing new. So Ehrlich had a 4 year term and the problem is at his feet. Wake up and nudge your buddies. Maybe after O'malley suceeds in driving out all the Corperations (some tax is better than no tax) and raises the sales tax to 6% this will be a great state to live in. I hope he spends these taxes on roads they'll be needed for the people moving else where.

The captive REIT bill passed last session. View the bill info here.

The holding company issue was addressed in 2004. View the bill info here

My first thought was what you do when the corporations start to leave town, I am certain that this will happen, then what, because you will still have a tax burden. The real problem is not corporations and tax shelters but the tax law itself. The governor could very easily approve slots and improve the race track to generate surplus revenue without affecting those individuals and business who will lose the most, we already have the lottery so what is the difference. Everything is so politicized with no real good intent.

I find it unbelievable how many people just blindly regurgitate the fallacies of the Republican Party and the Chamber of Commerce. The don't want fair taxation because although they demand the poor and middle class to be responsible that never demand that of themselves. Shifting revenue to avoid taxation in immoral and should be illegal. Marylander's made these companies profitable in the state - we should demand they pay proper taxes. WalMart, ToysRUs won't leave - we are one of the richest states in America - they love the money we bring to their coffers; they just don't want to give back to their benefactors.

//WalMart, ToysRUs won't leave - we are one of the richest states in America - they love the money we bring to their coffers; they just don't want to give back to their benefactors.//


Well-said! Besides, if a company is paying its state taxes in a lump sum that is apportioned to state governments...there is neither an incentive NOR a disincentive to investing in a given market, no? Any tax savings they'd gain by fleeing a state would be outweighed by not selling to that market.

There's more to running a business than just having low taxes, you know. Little thing called "customers". Tough to have customers in Maryland if you don't have any stores in Maryland.

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.
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