Schaefer enters into $88 million battle

That's his estimated cost of amnesty period for Delaware tax loophole

March 26, 2004|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Comptroller William Donald Schaefer is battling a legislative measure that he estimates would cost the state $88 million by providing an amnesty period for companies that have sent profits to Delaware in order to avoid Maryland taxes.

The state Senate passed a bill last week to make clear that the government has a right to collect from Delaware holding companies that are just a tax shelter for Maryland operations, but the legislation would offer significant discounts for businesses that step up between July and November to pay up.

It would forgive all taxes owed prior to 1995 while wiping away penalties and halving the interest on taxes owed after that date.

The House passed a holding companies bill Tuesday with no amnesty provision.

Schaefer, who has made Delaware tax shelters a major issue, has urged Gov. Robert L. Ehrlich Jr. to oppose the amnesty plan before legislators hash out a final version. In a letter delivered to the governor Wednesday, Schaefer called it "bad fiscal policy and bad tax policy."

"It's vitally important that amnesty not be included," Michael D. Golden, a spokesman for the comptroller, said yesterday. "I'm not sure the state can afford to lose $88 million."

The comptroller's office says that dozens, possibly hundreds, of corporations have avoided taxes in Maryland because Delaware does not tax income on intangible property such as icons and slogans. By transferring the property to a holding company in Delaware and paying royalties for the use of those assets, a corporation lowers its income and taxes in Maryland.

Shareese N. DeLeaver, an Ehrlich spokeswoman, said the administration "tends to support" the comptroller's position on amnesty. But it would want to see amendments if amnesty is removed to ensure that legitimate businesses are protected, she said.

Sen. J. Lowell Stoltzfus, the Eastern Shore Republican who is the Senate minority leader, said the bill casts a "broad net" that would penalize real businesses as well as catching sham holding companies.

"Corporations are extremely mobile, and if they don't like to do business in Maryland, they'll take their jobs and move to where they have a more favorable climate," he said.

The amnesty provision makes sense to him. Otherwise, he said, he can't see the comptroller collecting without battling each holding company in court.

Senators expect the bill would generate $122 million next fiscal year. Schaefer said the figure is grossly overstated if the amnesty becomes law, and he said that would undermine his office's continuing efforts to collect.

His office has taken 70 holding companies to court to get back taxes, penalties and interest. Most cases are pending, but after Maryland's highest court ruled against two holding companies last year, a handful settled with the comptroller for about $14 million.

If all 70 were to take advantage of amnesty, the state would have to refund $8.2 million and write off claims of $80.3 million, Schaefer said. He foresees the possibility of other holding companies avoiding most or all payments.

Steve Hill, director of the Maryland Budget and Tax Policy Institute, a nonpartisan research organization based in Silver Spring, said the only upside he sees to amnesty is that the state might get some money more quickly.

"The message we're sending companies is that if you cheat on your taxes long enough, we'll forgive you," he said. "It makes it so much more difficult to enforce the tax laws going ahead."

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