Mailbag: That “Delaware Loophole” Thingamajig

A few readers responded to my op-ed on corporate tax reform, asking “If you want fairness, why don’t you support ‘ending the Delaware Loophole’?”

Unfortunately, many believe that the made-up phrase “Delaware Loophole” means businesses headquartered in Delaware evade paying Pennsylvania taxes.

To be clear, there is no loophole and it isn’t specifically related to Delaware.

What those who use the term really mean is they want to shift to using Mandatory Unified Combined Reporting (MUCR) on corporate tax returns, rather than the current system of Single Filing.  This means a multi-state company would have to submit returns from all their national and international operations and subsidiaries to the state Department of Revenue, rather than simply the Pennsylvania company.

That sounds boring and complicated.  For those who read through that last paragraph, pat yourselves on the back.

Those pushing this agenda have masterfully crafted a talking point saying “Close the Delaware Loophole!”  This term misleads people.  Some think that if a company has a headquarters in Delaware or another state, they don’t pay corporate taxes.

False: Corporations, regardless of where their headquarters are, still have to pay our rate of 9.99% on their Pennsylvania profits.  Changing the method of tax reporting doesn’t mean the state will get more revenue.  There is little difference in revenue between states with MURC and states with Single Filing. 

Moreover, the talking point that 70 percent of corporations don’t have any Corporate Net Income Tax liability is true. But it is because most corporations don’t earn profits (either because they are losing money, or because they are legal corporations without any actually operations).  It has nothing to do with our Single Filing method of tax reporting.  In fact, some states that use Mandatory Unified Combined Reporting also have 70 percent of corporations filing tax returns with zero tax liability.

All the move from Single Filing to Mandatory Unified Combined Reporting does is to give the Department of Revenue more power and make filing tax returns more complex.

So how do “Delaware Loophole” proponents think Pennsylvania will collect additional revenue under MUCR? It relates to corporations when they pay an affiliated company (or a holding company) for the rights to a logo, license fees, royalties, etc.  These are business expenses, and are thus would take away from a company’s profits.  The allegation—though without much evidence—is that companies are transferring profits out of state without having a legitimate business expense.  If the state shifted to Mandatory Unified Combined Reporting, it would allow the Department of Revenue to review all of a company’s records.

However, another proposal put forth (currently part of HB 440) would require companies to report these sorts of transactions to affiliated companies, and would prohibit certain payments for “intangible assets.”  This is termed an “add-back provision.”

However, “Delaware Loophole” folks still say this doesn’t “Close the Delaware Loophole,” which is their prerogative since they invented the phrase. 

But readers should know that “Close the Delaware Loophole” is just a catch phrase to disguise a bad policy proposal.