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A green light to tax dodges

RALEIGH — In the waning days of the legislative session, North Carolina lawmakers may give a big tax break to large, multistate corporations that do business in the state.

Not that legislators will say that’s what they are doing. They’ll talk about tax fairness or uniformity.

In fact, if the bill in question passes, legislators will be giving multistate corporations a green light to engage in the kind of creative accounting that state tax officials have been fighting for a couple of decades.

The result will be a tax break. No one will ever really know its true value.

It may be tens of millions of dollars. It may be hundreds of millions. Over time, it may be billions.

No one will know the exact value because it’s impossible to predict how many corporations will stoop to tax dodges designed to shift income from North Carolina to other states that have no state corporate income tax.

What is known is that North Carolina has gone to court in the past to prevent these kind of tax dodges.

A decade ago, the state challenged mall retailer The Limited when it paid earning from North Carolina to a Delaware holding company for use of the holding company’s “trademarks.” The trademarks were retail outlet names and the holding company was a shell company owned by The Limited.

More recently, the state challenged some creative accounting from Wal-Mart. The retailer deducted rent payments to its out-of-state holding company — to which ownership of store buildings had been transferred — from its state earnings.

In each case, the state won.

Wal-Mart paid $33 million. Other companies paid up without having to go to court. The result was that North Carolina trimmed a budget shortfall in the winter of 2009-10 by $400 million.

A big reason that the state was able to win the cases and stop the tax dodges is a state law that allows the state revenue secretary to require companies to file what are known as “consolidated returns” when he or she suspects income-shifting. A consolidate return requires that a parent company show all income earned by it and its affiliated companies, and the ratio earned in North Carolina is then determined.

Twenty-one states use a similar method for all corporate income tax reporting purposes.

That hasn’t happened here. A bill that was scheduled to be considered by the state Senate this past Tuesday would repeal the current state rules and make it far more difficult to force consolidated returns under any circumstances.

It would do so by creating a gaping loophole making the shifting of income legal as long as companies could demonstrate that the transaction had “economic substance.” That phrase is defined as having any material benefit to a company other than less taxes.

Accounting firms are no doubt dreaming up reams of “material benefits.”

The result is almost certain to be more pressure to pay more taxes by individuals and businesses who can’t shift income or afford heavy-hitting accountants and lobbyists.

Scott Mooneyham writes about North Carolina politics for the Capitol Press Association.

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