WASHINGTON – The Maryland Comptroller’s Office hopes the Supreme Court’s refusal to step in to a state tax case sends a message to companies that have sheltered more than $32 million in taxes here by invoking the protection of Delaware holding companies.
“The taxpayer in each instance is going to have to make the decision, ‘Do we want to litigate this with Maryland all the way up to the Court of Appeals and try to establish that our situation is different, or . . . just pay up and put this part of our lives behind us?'” said Assistant Attorney General Gerald Langbaum, who represented the comptroller.
But others said the high court’s decision to let stand a Maryland Court of Appeals ruling against the Syms Corp. means no such thing.
“A lot of the other companies are going to choose to continue litigation, saying, ‘But my facts are different,'” said Karen Syrylo, a state tax consultant to the Maryland Chamber of Commerce.
The Supreme Court on Monday declined to hear an appeal by SYL Inc., a wholly-owned subsidiary of the discount clothing store Syms, of a June ruling by the Court of Appeals that said Syms could not deduct royalty payments to SYL from its taxes. The appellate court decision overturned rulings by the Maryland Tax Court and the state circuit court that sided with Syms.
The comptroller’s office estimates that Syms owes $931,966 in taxes, penalties and interest for such royalties from 1986, when SYL was created, through 1993, the last year Syms was audited by the state before the lawsuit was filed.
The comptroller’s office said 35 similar cases that have been heard by the Maryland Tax Court — with about $21 million in taxes at stake — could be affected by Monday’s Supreme Court ruling. Another 33 cases, worth about $11 million in disputed taxes, are awaiting decisions in the hearings and appeals division of the comptroller’s office.
But the Supreme Court’s ruling Monday may not be the final word. Crown Cork and Seal, which also lost at the Maryland Court of Appeals, still has a petition pending before the high court. The Supreme Court is expected to make a decision in that case, worth just over $2 million in taxes, penalties and interest to the state, in late November or early December.
Even then, the fight may not be over. An attorney for Syms disagrees with the comptroller’s assertion that penalties are due, noting that the tax court did not levy a penalty and the appeals court did not address the issue.
Harry Shapiro, the Syms attorney, also agreed with Syrylo that the other companies caught in the fight — which include national retailers such as The Limited, Lerner New York, Victoria’s Secret and Abercrombie & Fitch, among others — will not be so eager to give in.
“It will have to be fought out on each case in terms of the facts,” Shapiro said.
Shapiro noted that the Court of Appeals held the case for more than two years before ruling in June — just two weeks after Gov. Robert Ehrlich vetoed a bill that would have taxed businesses operating in Maryland under a Delaware holding company, among other provisions.
“The case got intertwined in politics,” Shapiro said.
But politicians said the fight may not be over from their end, either.
“I’m glad that the Court of Appeals made the decision that it did, but we still need legislation to clarify the issue,” said state Sen. Paul Pinsky, D-Prince George’s, who sponsored the legislation that Ehrlich vetoed.
“The Court of Appeals decision was fairly narrow,” Pinsky said. “I’m not sure it closes all the loopholes.”
He said that it may not be him, but someone will definitely sponsor legislation in the next legislative session to make these companies pay taxes in Maryland. He added he believes closing the loopholes could bring in $100 to $200 million in tax revenue.
“Our hope this year is to have a stand-alone bill or set of bills that would simply deal with the corporate loopholes,” Pinsky said.