Senate closing ‘Delaware Loophole' for chain stores

WalMart and other national chains would be subject to new taxes HARRISBURG — The state Senate has re-introduced legislation intended to create a fairer tax system by closing the infamous “Delaware loophole.” “No one likes to pay taxes, but that doesn’t give anyone the right to shift their burden to others through bookkeeping tricks,” State Sen. Christine M. Tartaglione said. “Pennsylvania needs to join the rest of the country in moving toward a fair, modern tax system using 21st century accounting.” Tartaglione, a Philadelphia Democrat, has introduced Senate Bills 226 and 227, which would force corporations that do business in Pennsylvania to report profit from all related subsidiaries to allow taxation on the Pennsylvania portion. With the profits of all subsidiaries - including those out of state — combined for the purposes of taxation, there would be no benefit in setting up a tax shelter in another state. In question is the “Delaware loophole,” which gets its name from a provision in Delaware tax law that provides tax exemption for income from “intangible assets,” such as rent, trademarks, royalties, and copyrights. To avoid corporate income taxes, corporations set up “passive investment companies” in Delaware and pay the subsidiaries outlandish royalties or other fees to shelter the money from taxes in other states. Wal-Mart stores across the country pay ‘rent’ to a Delaware holding company controlled by Wal-Mart executives, saving them about $90 million per year, according to CNN. local Toys R Us stores pay $55 million in royalties to a Delaware holding company for the rights to use the image of Geoffrey the Giraffe. If the bills are signed into law, Pennsylvania would become the seventh state since 2004 - and the 23rd state overall - to adopt the “combined reporting” standard to close the loophole. “This activity is an insult to hard-working business owners who spend their time thinking about innovation and efficiency rather than tax-dodging tricks,” Tartaglione said. Tartaglione first introduced the combined reporting measures in 2003. In 2004, the bi-partisan Pennsylvania Business Tax Reform Commission recommended adoption of combined reporting, but Senate Bills 801 and 802 (2003-04), and later attempts to close the loophole, have failed under pressure from corporate lobbyists. “This session is different,” Tartaglione said. “This year’s budget is going to force the legislature to take a hard look at some good programs.