Drive on to nationalize tax loophole for businesses

Daily Record, The (Baltimore), May 12, 2004 by Kathleen Johnston Jarboe

A Maryland tax official yesterday criticized the effort by business groups to pass a national law that would legalize tax shelters and cost states millions in lost revenues.

It is a significant effort to roll back state income taxes [on businesses], said Deputy Comptroller Steve Cordi.

The proposed law would prevent a state from taxing businesses that do not maintain a physical presence in the state for 21 or more days in a given year. It also would establish several exceptions to broaden and narrow the rule, including making large entertainment events that last more than one day taxable.

I think the legislation would authorize or legalize tax sheltering to a degree that it would undermine the equity and viability of state business taxes, including the corporate income tax, said Dan Bucks, executive director of the Multistate Tax Commission, an organization that promotes fairness and effectiveness in state taxation and the preservation of states' taxing rights.

The amount of tax sheltering possible under the legislation would leave primarily smaller and local businesses paying the tax bill, Bucks said.

The bill is scheduled for a hearing in the U.S. House Judiciary Subcommittee tomorrow.

Cordi plans to attend but not testify. Instead, the revenue commissioner of Tennessee is scheduled to testify on behalf of states.

The bill jeopardizes the efforts by the Maryland Office of the Comptroller during the past several years to close a loophole in Maryland that allows large companies to take advantage of varying tax laws in neighboring states.

Last year Comptroller William Donald Schaefer won a seven-year legal battle to tax two companies on the income they shielded for years through holding companies.

The two firms, a subsidiary of retailer Syms Inc. and Crown Cork & Seal of Delaware Inc., created tax-free income by paying royalties to Delaware subsidiaries in exchange for using the company's brand names and advertising slogans, according to the comptroller. The companies could then deduct the royalty payments from their state tax bills, claiming the income was earned by the often office-less, staff-less office in Delaware.

Delaware doesn't tax royalty income.

Schaefer has estimated that hundreds of businesses in the state use the shelter.

The comptroller has used the ruling from the Maryland Court of Appeals to pursue other businesses that use the loophole.

For example, MCI Inc., formerly known as WorldCom Inc., used the loophole to avoid $62 million in Maryland taxes between 1999 and 2002, according to the comptroller.

It clearly would reverse Syms and Crown. It would reverse them outright, Cordi said of the proposed federal law.

Cordi said a bill passed by the Maryland General Assembly could limit the harm of the federal legislation. But Gov. Robert L. Ehrlich Jr. has not said whether he will sign the bill.

A business representative called the federal proposal a step in the right direction. He said the law would imitate current standards preventing states from taxing businesses on out-of-state sales.

[Congress] should address this issue once and for all, said Joseph R. Crosby, the legislative director for the Council on State Taxation. Crosby said business groups favored making the business income tax issue a part of an ongoing debate about whether states could charge taxes on currently untaxed purchases like orders over the Internet.

State tax advocates said they fear the proposed bill and efforts to tack it onto sales tax legislation would open loopholes even in the states with the strongest taxation laws.

California - a state that uses a system designed to prevent businesses from shifting assets from state to state to avoid taxation - could lose up to $525 million a year in revenue under the proposed law, according to the California Franchise Tax Board.

An official from the Multistate Tax Commission said his group was preparing a study for this summer that would show the cost to other states.

Congress should not be passing a law that requires states to scramble to figure out ways to save their taxes. The real question is: Why should a state change its laws to try to salvage the taxes it's levied for several years in response to a federal bill? Bucks said.