High court's ruling spotlights tax loopholes

JEFFERSON CITY, Mo. -- In gearing up for the 2003 legislative session, Gov. Bob Holden has been traveling the state to build support for his proposal to close alleged corporate loopholes in Missouri's tax code.

A closely divided decision handed down by the Missouri Supreme Court on Tuesday highlights the need to address the issue, said Holden's spokeswoman Mary Still.

"We knew our law was weak," Still said. "You have to be a pretty fat pig not to wiggle through that loophole."

However, business groups such as the Missouri Chamber of Commerce oppose changes that would increase corporate tax collections, fearing it would deter companies from coming into the state.

"We don't want to be raising taxes on Missouri employers when we're leading the nation in job losses," said Ray McCarty, the chamber's director of fiscal affairs. "We want to make Missouri as attractive as we can to business."

In a 4-3 ruling, the court's majority said the state can't tax corporate income that businesses shift to subsidiaries in states with favorable tax laws.

While Missouri law allows taxation of income "derived from sources within Missouri," it doesn't specify what those sources include.

"Taxing statutes in particular are to be strictly construed in favor of the taxpayer and against the taxing authority when any ambiguity exists," Judge Ronnie L. White wrote for the majority.

White was joined by one other Democratic appointee and two Republican appointees. Two Democrats and a Republican dissented.

The case was brought by three holding companies, all based in Delaware, that have corporate partners doing business in Missouri. The Delaware corporations, all established in the last decade, exist merely to collect royalties. Since Delaware exempts revenue from royalties from taxation, the holding companies avoid paying state taxes.

The Missouri Department of Revenue sought to collect taxes from the holding companies, claiming they are shell corporations established for the purpose of tax avoidance and that their income is really derived from taxable transactions within the state. The companies appealed to the Administrative Hearing Commission, which sided with the revenue department.

However, the Supreme Court majority overruled the commission, saying that since the companies have no physical presence in Missouri, the state can't tax them.

The income "is outside the scope of Missouri taxation because the Appellants have no contact, and specifically no sales, within the state," White wrote.

'A legal fiction'

However, in a spirited dissent written by Judge Michael A. Wolff, the court's minority says the majority reasoning permits "a legal fiction to be used perversely for avoiding legitimate taxes imposed by the state of Missouri."

While courteously referring to the companies as "taxpayers" throughout the dissent, Wolff opens by saying they perhaps should more properly be called "tax-evaders."

Wolff said the royalty agreements are structured so that corporations doing business in Missouri transfer most, if not all, of their profits to the out-of-state holding companies and, therefore, avoid taxation.

"This certainly is clever, but it is absurd to say that Missouri cannot tax the income derived from economic activity conducted on behalf of these 'taxpayers' in this state," Wolff wrote.

In what he dubs his "fair share" plan, Holden proposes erasing any ambiguity in the state's corporate tax code in regard to companies with such structures. He has said it is unfair that small Missouri-based businesses have to pay taxes when large corporations can avoid doing so through legal trickery.

"We can wise up like other states or we can be chumps," said Still, his spokeswoman.

Fierce opposition expected

Closing the loopholes would bring as much as $100 million a year into the state treasury. While the proposal will be one of the Democratic governor's top priorities when the legislative session begins Jan. 8, it is expected to meet fierce opposition from Republican lawmakers, who will control both chambers of the General Assembly.

McCarty, of the Chamber of Commerce, said it might not even be issue state lawmakers can resolve. Although the court didn't cite it in this case, McCarty said the majority seems to be indirectly arguing that trying to tax out-of-state corporations could be violation of the Commerce Clause of the U.S. Constitution. That clause prohibits states from regulating interstate commerce.

"Congress could pass a law if it felt it necessary to address the issue," McCarty said. "If the state legislature adopts changes, it could be subject to a constitutional challenge at the federal level."

The case is Acme Royalty Co., et al, v. Department of Revenue.

mpowers@semissourian.com

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