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.