New Report Sheds Light on Three Loopholes that Allow Businesses to Avoid Paying $150M to $200M per year in Maryland Taxes 12/31/2002
From: Steve Hill of the Maryland Association of Nonprofit Organizations, 301-565-0505 WASHINGTON, Dec. 31 -- Maryland businesses avoid paying $150 million to $200 million per year in state and local taxes by artful "tax planning" that takes advantage of loopholes in Maryland's tax code. A new report by the Maryland Budget and Tax Policy Institute explains how businesses take advantage of three loopholes to avoid paying taxes on their profits or real estate transfers. The report also explains how the three loopholes can be closed. "Closing these loopholes is critical in the context of the state's budget situation," said Steve Hill, director of the Maryland Budget and Tax Policy Institute and author of the report. Maryland is expecting revenues to fall $1.2 billion short of what is needed to maintain current state services next year. The shortfall is projected to exceed $2 billion within four years. The largest loophole allows multi-state corporations to shift profits earned in Maryland to subsidiaries located in Delaware or other states, thus avoiding an estimated $100 million per year in Maryland corporate income taxes. These subsidiaries-commonly referred to as Delaware holding companies-generally employ no one and produce nothing. Rather the subsidiaries own the corporate trademarks and allow companies to dodge paying income taxes in Maryland and other states. Stores in Maryland pay fees to these Delaware subsidiaries for the rights to use the company's trademarks, thus shifting profits from Maryland to Delaware where they will not be taxed. For example, Toys R Us created and owns the Delaware-based Geoffrey Inc, which owns the Toys R Us name and the image of Geoffrey (the giraffe). Toys R Us stores in Maryland and other states pay large fees to Geoffrey Inc. for the rights to use the Toys R Us name. These payments are deducted from Maryland-based profits, effectively reducing the income that can be taxed here. Similarly, Syms stores in Maryland pay fees to Syl Inc-a Delaware corporation owned by Syms-for the rights to use the slogan "An educated consumer is our best customer." "Essentially, these corporations are taking profits that are earned in Maryland and shifting them to Delaware where we can't tax them. For multi-state corporations, avoiding taxes is as easy as moving money from your right hand to your left hand," said Hill. Most states with a corporate income tax have closed this loophole, but Maryland has not. "This is an issue of fairness," said Hill. "Local, independent businesses are paying their taxes, while their large, multi-state competitors are not." The report notes that the share of state taxes collected from businesses has dropped by half since 1980. "Policymakers will be considering cuts in programs that Marylanders demand, such as health care and education, and tax increases on individuals. The first step in balancing the budget ought to be collecting taxes from those businesses who have been avoiding paying their fair share," said Hill. --- Raising Revenues Without Raising Rates: Closing Three Tax Avoidance Loopholes is available online at or can be requested by calling 301-565-0505. The report is 8 pages long. About the Maryland Budget and Tax Policy Institute The Maryland Budget and Tax Policy Institute provides timely, accurate, and accessible information budget and tax policy issues in Maryland, with an emphasis on how policy choices affect low-income and other vulnerable populations, and the community programs that serve them. The Institute is a project of the Maryland Association of Nonprofit Organizations. Maryland Budget and Tax Policy Institute 8720 Georgia Avenue, Suite 303, Silver Spring, MD 20910; 301-565-0505; fax: 301-565-0606 (To receive the latest news on MBTPI research, ask to be placed on our E-mail update list); Bookmark our webpage at http://www.marylandpolicy.org |