Lawmakers seek to widen corporate tax loophole

Posted June 17, 2011 2:38 p.m. EDT
Updated June 17, 2011 6:37 p.m. EDT

Sen. Bob Rucho, R-Mecklenburg, lambasted Democratic lawmakers during a Feb. 3, 2011, floor debate, saying they have been fiscally irresponsible.

North Carolina may be struggling to cover a record $2.5 billion budget gap, but that’s not stopping Republican House and Senate leaders from pushing through a last-minute tax change that could cost the state tens of millions of dollars.

Most of House Bill 619 is aimed at restricting the Dept. of Revenue’s ability to go after corporations it thinks are underreporting their North Carolina income. But one eleventh-hour amendment, authored by Sen. Bob Rucho, R-Mecklenburg, would reopen a potentially gigantic loophole state lawmakers closed ten years ago.

The amendment would offer multi-state corporations a legal way to shift their North Carolina income to other states, reducing the corporate taxes they pay into tax coffers here. That loophole is “royalties and trademarks.”

Essentially, a corporation headquartered elsewhere can “charge” its NC operation for the right to use the corporate trademark. That price can be as high as the corporation wants it to be, and can be used to offset any profit the corporation made in North Carolina that year, erasing its tax bill.

Here’s an example of how it works: Suppose I’m Multistate Megastore A, headquartered in Delaware. Our NC operation made $100 million revenue last year. If I charge our NC operation $100 million dollars to use the “Multistate Megastore” trademark, then the NC operation has no profit, and therefore no state tax bill.

After a major clothing chain tried something like this a decade ago, state lawmakers gave the Secretary of Revenue the power to look into “royalty and trademark” payments to see if they actually have economic value. If they’re just a way to move money out of NC, the DOR can go after the corporation for the difference.

House Bill 619 would reopen the loophole by taking away that power.

Canaan Huie with the Dept. of Revenue testified in committee this afternoon the change would cost the state at least $32 million a year, just for agreements the DOR has made in existing trademark cases. Those corporations would no longer have to meet those agreements.

And that estimate doesn’t take into account the many corporations who, seeing an open door, might just start selling their trademarks to their NC entities to lower their tax bills.

Barry Boardman with the Fiscal Research Division couldn’t even offer an estimate of what the measure would cost the state: “It’s very difficult to put a number on that, so we didn’t.”

The House will vote on the measure today.