Corporations Should Pay Their Fair Share

Wouldn't it be great to have your kids go to Pennsylvania schools, visit your ailing mother at a state-funded nursing home, commute to work on SEPTA trains. . . yet pay no taxes, as if you lived in an income tax-free state like Nevada? Well, unless you're willing to endure one heck of a commute, you just can't do it. That is, unless you're a big corporation with tax experts on retainer. Thanks to huge loopholes in Pennsylvania laws, you can just set up a P.O. box in Nevada-or even a little closer to home in Delaware-file a few papers, and presto. . . you've joined the estimated 80 percent of corporations in Pennsylvania that pay no Corporate Net Income (CNI) taxes.

PennPIRG believes that companies in Pennsylvania have a responsibility to pay taxes on profit earned here. We also believe the public should have the right to review state tax filing for publicly traded corporations to determine which companies are paying their fair share, and which are cheating taxpayers.

Corporations Play Shell Games With Profit

Many are familiar with Bermuda Tax Cheats, whereby companies like Tyco incorporate in a country that may not assess taxes, even though the company does most or all of its business in the U.S. There's a similar game being played here within our own borders, where companies that do a lot of business in Pennsylvania incorporate in tax-haven states like Delaware or Nevada.

This loophole exists in many states, and the New Jersey legislature closed it recently. During their debate on the subject, elected officials learned of huge disparities in who pays corporate taxes when it was revealed that a large supermarket chain paid significantly less in taxes than a small corner store.

Pennsylvania Suffers When Corporations Don't Pay

Declining tax revenue contributes to state budget deficits, which have plagued Pennsylvania since 2002, and are likely to continue as costs for senior citizen programs will keep growing. As a result, valuable public services like public transit, health care for the disabled, drug and alcohol treatment programs, environmental protection and others have suffered big budget cuts. And when some unscrupulous companies evade state taxes, that means individual taxpayers, consumers, and businesses that do pay their fair share end up shouldering a bigger burden.

If everyone pays their fair share, not only could we fund many of the programs and services we care about, but we might be able to lighten the tax burden on everyone in time.

The Corporate Shell Game

• Step 1: The corporation sets up a Delaware subsidiary, legally transferring ownership of patents and trademarks.
• Step 2: In exchange for royalties, the subsidiary allows the Pennsylvania corporation to use the patents and trademarks.
• Step 3: The Pennsylvania corporation pays significant royalties, giving the appearance that it made little or no taxable profit.
• Result: The corporation pays little or no state taxes, since Delaware doesn't assess corporate taxes on "royalties" earned by a company.

Which Corporations Use Tax Loopholes?

More than 50 big corporations have been sued in other states over their use of this loophole, many of which do business in Pennsylvania and are likely using the loophole here as well. A recent PennPIRG study estimated that just 37 of those companies may be draining $63 million in revenue from Pennsylvania each year by using the loophole here, including Gap, Home Depot, Budget Rent-A-Car and others. But those are just the companies we know about-corporations don't have to open their tax filings to the public, so the amount of money Pennsylvania's losing each year could be as high as $300 million.

Case Study: Toys R' Us

This corporate tax loophole is sometimes called the "Geoffrey Loophole" after Toys R Us. Toys R Us set up Delaware subsidiary called Geoffrey, Inc., which received more than $55 million in royalty payments from its affiliates in one year alone. That means states that depended on taxes on that $55 million to repair roads and bridges, fund education and provide health care got the short end of the stick. Meanwhile, Toys R Us and Geoffrey, Inc. increased their profit margin, since Delaware doesn't tax corporate profit earned from "royalties".

To ensure that all corporations pay their fair share, PennPIRG is urging the Legislature to:

• Close the corporate tax loopholes that allow businesses to shift their profit to subsidiaries in tax-haven states like Delaware by adopting a policy known as "combined reporting." Combined reporting that requires corporations file a tax return that combines their profit from their out of state subsidiaries. This allows our state Department of Revenue to figure out how much of their profit was earned in Pennsylvania.