By Rolando Garcia
ANNAPOLIS – Only eight of the 70 corporations that have avoided Maryland taxes by taking advantage of the so-called Delaware loophole have taken advantage of an amnesty program and agreed to pay up, according to the state comptroller’s office.
Comptroller William Donald Schaefer had offered to reduce company penalties from 25 percent to 2 percent if they agreed by Dec. 31 to pay any owed current and back taxes. But three weeks after the deadline, 27 companies rejected the settlement, 10 failed to respond and the others have asked for more time.
The companies owe at least $78 million, the comptroller’s office said, although the real total is probably much higher because it only reflects totals from audits in the mid-1990s, said Michael Golden, Schaefer’s spokesman.
Another 240 companies are suspected of evading taxes through the Delaware loophole and the comptroller is investigating, Golden said.
These suspect Maryland companies set up subsidiaries in Delaware to which they sell patents, trademarks and copyrights. The parent company then pays its own subsidiary hefty fees for the use of this intellectual property, reducing its taxable Maryland income. Because Delaware does not tax intellectual property, that income is not taxed there, either.
“For none of the companies on this list would payment (of back taxes) be a problem,” said Deputy Comptroller Stephen Cordi to the Senate Budget and Taxation Committee, which was briefed on the situation Tuesday.
The non-compliant companies may be more concerned what impact paying Maryland taxes could have in other states where they are also avoiding business taxes through the Delaware loophole, Cordi said.
The comptroller’s office will pursue court action against the companies that refuse to pay, Cordi added.
Last session, the General Assembly passed a bill closing the loophole, but Gov. Robert Ehrlich vetoed it because the issue was still pending in court.
In June, the Maryland Court of Appeals upheld the state’s right to collect taxes from SYL Inc., a subsidiary of Syms, which used the Delaware loophole, and Cordi said the cases involving most of the other companies were similar to the SYL case.
Ehrlich now supports a bill to close the loophole, and in his fiscal year 2005 budget unveiled last week, he estimates the closure would bring $110 million in additional revenue to help close the $800 million budget shortfall.
Senators also quizzed Cordi on whether, in light of the court decision, legislation was still needed. They also expressed frustration that the comptroller’s office had dodged the issue by not taking any position on the bill last session.
“You’ve identified a problem, but then don’t want to take any legislative action. Why?” said Sen. Patrick Hogan, D-Montgomery, vice chairman of the budget committee. “Take this message back to (Schaefer), that cooperation is a two-way street.”
Cordi said he was hopeful the comptroller’s office would work with the Assembly on any further legislation needed to close the loophole. -30- CNs-1-23-04