Schaefer offers deal on Delaware tax shelters

Md. is owed millions, state comptroller says

December 03, 2003|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

In a bid to quickly collect elusive revenues worth potentially hundreds of millions of dollars, Maryland's comptroller offered a deal yesterday to companies he said are avoiding state taxes by funneling profits to Delaware.

If they pay up by Jan. 30, he said, the penalty will be 2 percent instead of 25 percent.

"We're unusually generous," said Comptroller William Donald Schaefer. "They owe us the money. They've owed us for a number of years."

Dozens, possibly hundreds, of companies doing business in Maryland have set up "holding companies" in Delaware to reduce corporate income taxes.

The comptroller's office said it knows of 70 that owe at least $78 million in back taxes, interest and penalties - a who's who of companies, from CompUSA to Toys `R' Us to Victoria's Secret. The comptroller's office believes the estimate is low because it doesn't include taxes in the years after those firms' holding companies were audited.

Schaefer also plans to audit 240 holding companies suspected of owing Maryland taxes and will offer them the same deal. He's hoping to cut back on the $730 million budget deficit the state is expected to have next fiscal year.

Companies have set up holding companies across the state line because Delaware does not tax income from intangible property - slogans and icons, for example. Companies that open a holding company often transfer ownership of intangible property to the Delaware location, which might be nothing more than a mail drop, and then pay royalties to the holding company for the right to use those trademarks.

"What they're doing is selling their names to themselves and then deducting the price from their profits," said Steve Hill, director of the Maryland Budget and Tax Policy Institute. "If you set the price high enough, you make your stores `profitless.' And that's what's happening here and in many other states."

Schaefer thinks he's standing on solid ground to collect taxes from the holding companies because the Maryland Court of Appeals ruled in June that clothing retailer Syms Corp. and packaging manufacturer Crown Cork & Seal were circumventing state law by sending profits to Delaware holding companies. At stake was about $2 million in disputed taxes.

The U.S. Supreme Court declined to hear Syms' appeal last month, and Schaefer expects it will also turn down Crown Cork's petition.

Neither company responded to requests for comment yesterday.

"We knew these [Delaware] companies were not really companies - they were just dodges," Schaefer said. "They didn't pay any taxes to Maryland. We knew they should be paying taxes."

Schaefer said companies would have to decide whether to take his offer by the end of this month. He said the companies were notified of the possible deal by letter last month.

Gerald Langbaum, the assistant attorney general who represents the comptroller's office, said the Maryland Chamber of Commerce approached state Budget Secretary James C. "Chip" DiPaula Jr. to ask for amnesty on holding-company taxes owed before 1994. It's not an idea Schaefer supports.

But Karen T. Syrylo, the chamber's tax consultant and CPA, said the organization suggested only that the state find ways to encourage businesses to pay up now, rather than litigate for years.

"The comptroller won those two [court] cases, but there are a lot of companies who believe that their facts are very different from the facts in those cases," she said. "Our philosophy is let's help ... the state get the money that's due today before the legislature has to look at raising the rest of our taxes."

She said it's hard to say whether the one-time penalty reduction will be incentive enough for businesses to stop fighting and pay up.

To David Paulson, a spokesman for Progressive Maryland, a grass-roots community group that advocates for working families, the 2 percent penalty Schaefer offered seems "perhaps even too generous."

"But we know what the comptroller is trying to do," he added. "He's trying to do his job. ... This money is needed."

Ten states have passed laws making profit transfers to Delaware holding companies illegal, and 16 have tax structures that already allowed them to collect from those corporations, said Michael Mazerov, senior policy analyst with the Center on Budget and Policy Priorities in Washington.

New Jersey made the Delaware profit transfer illegal last year after finding that 60 percent of the largest corporations weren't paying income tax, Hill said.

"Delaware holding companies are certainly one of the most egregious tax shelters that are used by companies to avoid paying state corporate tax, and they're also one of the most easily nullified," Mazerov said. "There's really no excuse for states to see their corporate state taxes reduced because of this tax shelter."

In the spring, the General Assembly passed legislation that would have prevented businesses from opening holding companies solely for the purpose of owning their intangible property.

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