Md. tax offer has few takers

Schaefer pursues firms using Del. holding scheme

Penalty just 2% on back taxes

Companies that settle have until Jan. 30 to pay

January 01, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

The state comptroller got few takers for a pay-less-now deal to companies using Delaware shelters to avoid at least $78 million in Maryland taxes, interest and penalties.

Of the 70 companies that responded by yesterday's deadline, one paid approximately $250,000 and three others said they want to take the settlement. About a dozen asked for more time or made counteroffers. State officials would not identify the companies.

The comptroller's office said it's possible more letters postmarked yesterday will show up in the next few days. Companies accepting the settlement - which imposes a 2 percent penalty instead of the usual 25 percent for failing to file a Maryland tax return - have until Jan. 30 to pay up.

"We really had no idea what to expect with this settlement because it's never been done before," said Christine Duray, a spokeswoman for Comptroller William Donald Schaefer. "But we feel pretty confident ... that no matter what happens, we're going to be able to get some of that tax money back - one way or the other, whether it's through the settlement or through legal channels."

Numerous corporations have set up holding companies in Delaware because it does not tax income from intangible property such as slogans and icons.

These corporations transferred ownership of intangible property to the Delaware location, which might be nothing more than a glorified mail drop, and then pay royalties to the holding company for the right to use those trademarks. That reduces their income - and their taxes - in Maryland and other states in which they do business.

The state comptroller's office has been fighting that tax shelter for years. Some companies owe taxes from the 1980s, according to state audits.

Court approval

But in recent cases involving two Delaware holding companies, the Maryland Court of Appeals ruled that the state has the right to collect. The U.S. Supreme Court let those decisions stand.

Schaefer offered the reduced penalty at the beginning of last month to a list of companies that included well-known firms such as Toys `R' Us and Victoria's Secret. Holding companies that haven't been officially notified that they owe state taxes have until March 1 to write a check if they want the same reduced-penalty deal.

There could be quite a few out there: Schaefer said he plans to audit 240 holding companies.

Though it might appear that the settlement offer was a flop, Steve Hill, director of the Maryland Budget and Tax Policy Institute, said the number that took the deal is actually surprisingly high.

Create momentum

"Companies are avoiding paying their taxes in many states, and acquiescing in one may create momentum in other states to try and seek back taxes as well," he said. "Maryland is a relatively small state, so whatever they owe here is likely small potatoes compared to taxes they've been avoiding in other states."

That some signed up for the 2 percent penalty "may indicate that the companies think that they're fighting a losing battle," Hill added.

Sparks-based McCormick & Company Inc., which Schaefer says owes Maryland $3.2 million, says it's not taking the deal because it thinks the state is wrong.

"McCormick has filed a petition in Maryland tax court contesting this assessment," said Mac Barrett, vice president of corporate communications, in a statement. "The company believes it has a sound legal position for challenging this assessment but does not discuss matters under litigation."

Retry on loopholes

Progressive Maryland, a grass-roots community group that advocates for working families, thinks the result of Schaefer's settlement underscores a need for legislation closing corporate tax loopholes. Last spring, the General Assembly targeted loopholes as part of a massive tax-change bill that was vetoed by Gov. Robert L. Ehrlich Jr., but both legislators and the governor have indicated interest in trying again on the loophole issue.

"God knows the state needs the revenue - they're $700 million dollars in the red," said Tom Hucker, executive director of Progressive Maryland. "We're ending up subsidizing these companies that are cheating on their taxes."

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