By Rolando Garcia
ANNAPOLIS – The Senate voted Wednesday to close a loophole allowing Maryland corporations to avoid state taxes by shifting assets to Delaware.
Similar legislation passed the House last week, but the Senate version contains a provision waiving back taxes on Delaware income owed before 1995. Differences between the two bills must be reconciled before it is sent to Gov. Robert Ehrlich.
Comptroller William Donald Schaefer opposes the amnesty provision, said spokesman Michael Golden.
“(Amnesty) rewards bad corporations for illegal behavior,” Golden said. “This undermines our collection efforts by sending the message that if you wait long enough, all will be forgiven.”
The amnesty would prevent the state from collecting $88 million owed to it, Golden said.
In December, Schaefer had offered to reduce penalties from 25 percent to 2 percent for 70 companies found to be using the Delaware loophole if they agreed to pay any outstanding current and back taxes. So far, only 14 have agreed to pay.
The comptroller’s office is investigating another 240 companies for evading taxes through the loophole.
Ehrlich supports closing the loophole, but the administration is concerned the bill is too broad and may punish businesses taking legitimate tax deductions for Delaware transactions, said Neil Bergsman, director of budget analysis for the Department of Budget and Management.
Some Republicans argued the bill would hurt Maryland’s business climate.
The language of the House bill, which requires a company to prove with “clear and convincing evidence,” rather than a preponderance of the evidence, that its Delaware transactions are legitimate, is too stringent, said House Minority Whip Anthony O’Donnell, R-Calvert.
Differences between the House and Senate versions will be worked out in a conference committee.
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.
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.
Closing the loophole would bring $110 million in additional revenue, which Ehrlich is counting on to help close the $800 million budget shortfall.
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