Is Delaware An Unfair "Tax Haven"?
August 9, 2002
While it isn't easy for corporations seeking to avoid high tax rates to physically move their plants to other states or countries, intellectual property -- including retailers' valuable trademarks -- can be transferred to a holding company or subsidiary in a state or country with a friendlier tax environment.
A good example is Delaware, which collects no income taxes on out-of-state holding companies and investment firms. Retailers in high-tax states transfer hundreds of millions of dollars each year into Delaware subsidiaries.
- Tax officials in some states are complaining about domestic tax havens such as Delaware and Nevada, and tax experts say companies are saving billions of dollars on their tax bills.
- The average effective tax rate for corporations has declined from 9.6 percent in 1980 to about 5.2 percent today, according to state revenue officials.
- California and some two dozen other states tax companies on a "unitary" basis, combining all of a company's operations for tax purposes rather than targeting the in-state subsidiary or the Delaware holding company.
Officials of states that are losing revenue to this tax competition -- which they call abusive -- want to limit the practice. However, some experts say that like sales tax levies for goods purchased over the Internet, the question will eventually end up in the U.S. Supreme Court.
Source: Glenn R. Simpson, "A Tax Maneuver in Delaware Puts Squeeze on States," Wall Street Journal, August 9, 2002.
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