State targets corporate tax provisions

Tuesday, September 24, 2002

ST. LOUIS -- From bricks to toys, some companies have found a way to sell merchandise in Missouri and yet pay little or nothing in state corporate income taxes.

The companies have one thing in common -- they ship part of their profits to Delaware or other tax friendly states.

Among the companies using the technique are Toys R Us, Home Depot, Acme Brick Co. and W.L. Gore and Associates, which makes the waterproof Goretex fabric, among other things.

Gov. Bob Holden has cited the practice as a tax loophole that is costing the state $5 million a year in lost taxes. He wants the Legislature to stop it.

Under some scenarios, a company creates a Delaware holding company to own its patents or trademarks. Then the company pays royalties to the holding company so it can keep using the patents or trademarks. The royalties can be set at a percentage of sales roughly equal to the company's profit margin. The result is that the company owes no income tax, since Delaware exempts income from patents and trademarks.

Businesses fight back

Missouri state tax administrators are trying to tax the royalties, but businesses are fighting the policy in two cases heard last week by the Missouri Supreme Court.

The holding companies note that they have no offices, stores or manufacturing plants in Missouri. They point to a U.S. Supreme Court decision that said a company must have a physical presence in a state to be subject to sales and use taxes.

They argue the same should hold true for income taxes.

"If a corporation is not doing business in this state, then our view is it cannot be taxed," said Juan Keller of St. Louis, who represents Gore Enterprise Holdings Inc. and Acme Royalty Co.

Holden has said national franchises are setting up "dummy corporations" to avoid paying their share of Missouri taxes.

"Locally owned companies that have been good corporate citizens for many years are at a competitive disadvantage because of this loophole," Holden said.

Missouri budget officials refer to the tax scenario as the "Geoffrey" provision -- named after Geoffrey the giraffe on the Toys R Us logo. A holding company named after the giraffe has received millions of dollars in Toys R Us profits as royalty payments for use of the company trademark.

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