Delaware's grab

THE BALTIMORE SUN

SOMEBODY SMASHES your car windshield to steal the quarter sitting on the dashboard. He's 25 cents richer, but you're out 500 bucks. A fair transaction? Apparently, it's not a problem for authorities in Delaware.

Yes, that's right, our neighbors to the east seem to have the instincts of a second-rate criminal -- at least when it comes to business dealings. Recently, Delaware created a new type of corporate tax dodge that is breathtaking in its audacity. Its sole purpose? To help large companies hide profits from states like Maryland.

Remember the Delaware tax-loophole bill passed by the Maryland legislature last year? It cracked down on an old dodge -- bogus Delaware holding companies (mail drops in many cases) hiding out-of-state profits. A phony-baloney lease of a trademark or patent was the preferred tool of the trade. But states got wise, sued the corporations, and changed state tax laws to make it easier to collect on these scofflaws.

Well, the folks in Delaware realized they wouldn't be getting their proverbial quarters anymore so they've struck back. In June, Gov. Ruth Ann Minner signed legislation creating "headquarters management corporations" that take advantage of a loophole in Maryland tax law (and similar laws in other states).

Maryland law says a company paying a tax of 4 percent or more elsewhere is exempt from Maryland's corporate tax. So these new Delaware-based HMCs pay exactly that, a 4 percent tax on profits.

But here's the catch. Delaware will then reimburse the companies for up to 99 percent of this new tax. All these companies really end up paying for is a $5,000 registration fee and a guarantee that they'll employ at least six people. The result: Delaware's tax collectors get their equivalent of a few quarters while their counterparts in Maryland and other states are out millions.

Isn't that the moral equivalent of a robbery? Maryland is expected to collect more than $40 million from corporations annually because of the closing of the Delaware loophole. These are taxes on profits made in Maryland. Delaware is merely an interloper with a brick, the domestic equivalent of the offshore bank account.

Experts are skeptical Delaware's HMC scam will work. And, in fact, Delaware officials say no company has yet availed itself of this particular loophole. But just because the state has so far failed to break the windshield doesn't make its robbery attempt any less repugnant.

In a different era, this kind of behavior might have been resolved with a slap of the glove and pistols at 20 paces. Wars have been fought over less. And, by the way, how much of a fight could this tiny, ethically challenged state put up anyway? It'd be a cakewalk. When it's over, we'd keep the beach resorts and let New Jersey handle the rest.

Delaware is welcome to tax its own citizens any way it wants, of course, but when it starts stealing from its neighbors, there ought to be consequences.

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