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Complicated tax loophole target of intense debate

September 9, 2003
By: Megan Clarke
State Capital Bureau

Among the four tax breaks Missouri's governor is asking lawmakers to close is one that has been the subject of intense debate for sometime. It's a complicated loophole just recently created by the courts. Megan Clarke has an in-depth examination:

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As children and their parents shop for toys at Columbia's Toys 'R Us, they may not realize they're contributing money to what the governor describes as a major loss for the state.

Companies like Toys 'R Us are the target of Bob Holden's special session call to raise corporate taxes to get money for schools.

According to the governor, companies like Toys R Us are using a legal loophole to avoid paying Missouri corporate income taxes.

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Contents: WE HAVE LEFT A LOOPHOLE OPEN IN WHICH 25 OTHER STATES HAVE DISCOVERED AND SEEN FIT TO CLOSE. AT LEAST 25 OTHER STATES HAVE RECOGNIZED THAT THIS LOOPHOLE ALLOWS FOR OUT-OF-STATE TAX SHELTERS FOR NATIONAL FRANCHIZES AND THEY HAVE RIGHTFULLY CLOSED THE LOOPHOLE TO PROVIDE A LEVEL PLAYING FIELD FOR THE VAST MAJORITY OF BUSINESSES THAT PAY THEIR FAIR SHARE.

Essentially, companies like Home Depot and Toys R Us are able to claim as a business expense the cost they pay to their parent companies for the right to use company logos and trademarks.

The loophole is called the Geoffrey Loophole because it was arose from a tax case involving use of the Toys 'R Us symbol Geoffrey the Giraffe.

The administration estimates the loophole costs the state at least 15-million dollars per year in lost tax revenue.

Department of Revenue Public spokesperson, Jessica Robinson:

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Contents: LARGE CORPORATIONS WILL SET-UP SUBSIDIARIES IN DELEWARE OR NEVADA OR STATES THAT DON'T HAVE CORPORATE INCOME TAX. THE COMPANIES TRANSFER THINGS LIKE TRADE MARKS AND PATENTS TO THE SUBSIDIARIES. THE PARENT COMPANIES, THE COMPANY IN MISSOURI WILL PAY THE SUBSIDIARY OUTSIDE OF MISSOURI, LIKE A ROYALTY PAYMENT, THEN THEY CAN DEDUCT THAT FROM THE INCOME. THAT INCOME IS NOT TAXED IN MISSOURI.

Legislative Republican leaders have not disagreed with closing the loophole for out-of-state corporations. In fact, the loophole actually puts some Missouri businesses at an disadvantage if they don't have a corporate headquarters in a state like Delaware that does NOT tax corporate profits.

But the problem is drafting a bill that closes the loophole for companies like Home Depot, but does not impose an extra tax burden on Missouri's multi-state companies like Anheuser Busch.

Critics of the governor's proposal warn of the message that Missouri would send to business by raising taxes.

Missouri Associated Industries Lobbyist David Smith says that many businesses have had enough.

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Contents: I PROMISE YOU THAT WE WILL HAVE BUSINESSES MOVING OUT OF STATE. I HAVE HAD DIRECT CONTACT WITH SOME THAT HAVE SAID THIS WILL BE THE LAST STRAW. MISSOURI IS NOT A BUSINESS-FRIENDLY STATE AND THE NUMBERS SHOW IT.

Smith said that the business closures could have devestating effects on the state's job market, which means that the average Missouri citizen should be concerned about a corporate loophole closing.

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THEY NEED TO KNOW THAT THEY WILL BE LOSING JOBS. MISSOURI WAS NUMBER ONE IN JOB LOSS FOR THE LAST TWO YEARS. THE AVERAGE MISSOURI CITIZEN MAY NOT CARE ABOUT A LOOPHOLE, BUT THEY CARE ABOUT JOBS.

With aisles of toys, it's difficult for Toys 'R Us shoppers to understand why Geoffrey the Giraffe is the target of a tax increase. But the legislature hopes to clear that up soon.

Debate on the Geoffrey Loophole is expected to start tomorrow.