ANNAPOLIS – Companies owing Maryland more than $31.4 million in taxes have a chance to avoid heavy interest penalties – if they pay up immediately.
Maryland Comptroller William Donald Schaefer Tuesday said if companies who have taken advantage of the so-called Delaware loophole to avoid some Maryland taxes notify his office by Dec. 31, he will reduce their penalty from 25 percent to 2 percent.
“What I want them to do is pay all taxes, all interest, all penalties, for those years . . . I think by reducing it to 2 percent, we’re being unusually generous,” Schaefer said.
The comptroller said if all eligible companies accept the offer, the state will collect a much-needed $78 million in revenue – bringing it a step closer to closing the nearly $800 million budget deficit.
Last session, the General Assembly closed the loophole, but Gov. Robert Ehrlich vetoed it, knowing the issue was pending in court.
In June, the Maryland Court of Appeals upheld the state’s right to collect taxes from one specific corporation, called SYL Inc., that sold intellectual property – including trademarks – to its own subsidiary in Delaware and then paid that subsidiary a hefty fee, thus reducing its taxable Maryland income.
That income can’t be taxed in Delaware either. State law there limits taxing revenue from intellectual property.
Then in November, the U.S. Supreme Court denied SYL Inc.’s request to hear its case, effectively upholding the Maryland Court of Appeals decision.
Maryland is not the only state to go after these lost funds.
South Carolina, for example, recently won a case against Toys “R” Us and its Delaware subsidiary company Geoffrey Inc. – which officially “owned” the company’s kid-friendly symbol, Geoffrey the giraffe, said Gerald Langbaum, counsel to the comptroller.
Toys “R” Us is among the companies with cases still pending in Maryland’s tax courts, along with The Limited, Payless ShoeSource and Abercrombie & Fitch.
“Anybody who walks through the mall would recognize those names,” Langbaum said.
Those companies will likely be subject to the same ruling as SYL Inc., Langbaum said, but Karen Syrylo, state taxation consultant for the Maryland Chamber of Commerce, said many members believe their situations are different.
If companies choose not to accept the settlement, Schaefer said his office will pursue them for the full amount, which may mean many more years in court.
“The Maryland Chamber of Commerce is going to object to (the settlement), but they seem to forget that the state of Maryland won this case after seven years of litigation,” Schaefer said.
Syrylo, who met with Budget Secretary James C. “Chip” DiPaula last week to discuss potential solutions for closing the loophole, said it was too early to say whether the chamber would advise members to accept Schaefer’s offer.
She also declined to provide details of her discussions with DiPaula.
“What we’re trying to do is insure they have an option they’re willing to take. We want to come up with that best possible solution to make sure the state gets its money,” said William Burns, Chamber of Commerce spokesman.
Schaefer told reporters he was annoyed the chamber did not come to him first.
“I would be most unhappy if the budget director said, ‘Don’t pay the taxes, don’t pay the interest, don’t pay the penalty,’ because we’re still $795 million down.”