By Rolando Garcia
ANNAPOLIS – Gov. Robert Ehrlich is expected to sign a bill closing a corporate tax loophole, but veto a separate provision granting amnesty on back taxes owed by companies exploiting the loophole.
The loophole allows companies to avoid state business taxes by shifting income to subsidiaries in Delaware.
However, opponents say the bill is too broad and may punish businesses taking legitimate tax deductions for Delaware transactions.
Aris Melissaratos, Ehrlich’s secretary of Business and Economic Development, said he will recommend the governor sign the bill, although he hopes it will be fine-tuned next year by the General Assembly to make it more business-friendly.
“(Business reaction to the bill) has been definitely negative,” Melissaratos said. “The business sector is already over-burdened.”
Ehrlich has generally taken a pro-business stance, and his signing of the bill would be a “big disappointment” said Maryland Chamber of Commerce spokesman Karen Syrylo.
Although the chamber supports closing the loophole, Syrylo said, it believes the bill went far beyond its intended purpose of targeting sham companies.
The bill will generate about $110 million in revenue, which Ehrlich is counting on to help erase an $800 million shortfall in the 2005 fiscal year budget, which begins July 1.
The Assembly slipped a provision into the budget to cut the Department of Business and Economic Development’s $97 million appropriation by $14 million if Ehrlich vetoes the bill.
Melissaratos said he will also recommend Ehrlich veto the amnesty bill that would waive back taxes on Delaware income owed before 1995.
The Senate inserted the amnesty measure, but it was separated into its own bill at House negotiators’ insistence, said Ways and Means Committee Chairman Sheila Hixson, D-Montgomery.
Comptroller William Donald Schaefer opposed amnesty, and is trying to collect $88 million in back taxes from 70 companies. His office is investigating another 240 companies suspected of evading taxes through the loophole.
Amnesty supporters said it is unfair to punish companies for using what was until recently considered a legal loophole.
“The companies were told by the courts for years that what they were doing was OK,” said Sen. Rona Kramer, D-Montgomery.
But Schaefer argued that amnesty would undermine future tax collection efforts.
Maryland companies exploit the loophole by setting 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.
Ehrlich had vetoed legislation closing the loophole last year because the issue was still pending in court, but in June 2003, the Maryland Court of Appeals upheld the state’s right to collect taxes from SYL Inc., a subsidiary of clothing retailer Syms, which used the Delaware loophole.