A Maryland court has ordered clothing retailer Talbots Inc. to pay $1.1 million in back state income tax, the latest victory in a long-standing campaign by Maryland to crack down on companies that avoid paying taxes by setting up Delaware holding corporations.
The Maryland Tax Court ruled that Talbots owed the money for income taxes from 1993 to 2003. Talbots set up a subsidiary in Delaware called Classics Chicago to reduce its corporate income taxes.
"The vast majority of Maryland businesses are playing by the rules, and we will not allow a few large corporations to gain an unfair competitive advantage by flouting our tax laws," Comptroller Peter Franchot said yesterday.
A Talbots spokeswoman did not return calls.
Corporations have for years set up holding companies in Delaware because that state does not tax income from intangible property such as slogans and icons. Corporations transfer ownership of intangible property to the holding company, then pay royalties to the shelter for the use of those trademarks. This reduces income in Maryland and other states. Maryland has collected $267 million in taxes through Delaware holding companies and has $145 million in additional back taxes to collect, the comptroller's office said.
The state has won several court cases regarding the Delaware loophole, including a 2003 ruling by the Maryland Court of Appeals that two companies - Crown Cork & Seal and SYL Inc., the holding company for clothing retailer SYMS Corp. - were circumventing state tax laws. The U.S. Supreme Court also refused to hear cases from the two companies and ruled they were liable for the taxes.
The state is pursuing cases against Nordstrom, Gore, Cytec, RR Donnelly Receivables and Recot, an affiliate of Frito Lay.