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Such a messed up system

New Jersey's new budget is more of a compromise than it should be (which, again, is so insane considering the government is made up entirely of Democrats), but one good thing is that we're joining 25 other states in enacting a policy called combined reporting. The move has apparently caught the "business community" by surprise, which is kind of delicious (this only affects multi-entity corporations, so the idea that it's a burden on small NJ-based businesses is ridiculous).

Here is the loophole that combined reporting closes:

In the trademark holding company scheme, a chain sets up a subsidiary in a state that does not tax certain types of income, such as Delaware, Michigan, or Nevada. Home Depot, for example, has a Delaware-based subsidiary called Homer TLC, Inc. The subsidiary, which consists of little more than an address, owns the company's trademark, and Home Depot stores in other states pay the subsidiary a hefty fee for using the trademark. Home Depot then deducts those fees as business expenses from its tax returns in those states. Meanwhile, because Delaware does not levy corporate income taxes on earnings from intangible assets such as trademarks, the profits are not taxed in that state either.

Often the subsidiary will also lend money to the rest of the corporation, enabling a second stream of profits to be transferred free of state taxes through the payment of interest on the loan.

Another method, the REIT scheme, has been widely used by large retailers, notably, Walmart.

Established in the 1960s by Congress, REITs are exempt from paying taxes on dividends paid to their investors. Chain retailers have taken advantage of this by setting up their own REITs (often called "captive REITs"), which own the land and buildings that house their stores. The chain then pays rent to the REIT and deducts the rent as a business expense from its state tax returns. The REIT's income is then paid back to the chain as a tax-free dividend.

The fact that all of this is even possible is a sign of how messed up our economic system is.

Update: I spoke too soon. This isn't fully in yet.

Final update: This issue is apparently too in the weeds for most of NJ's media, but the whining from NJ's Chamber of Commerce seems to indicate that it was included although this article indicates that the provision was "slightly modified... to include more specifics". Seems mostly like a win.

By fnord12 | July 1, 2018, 12:14 PM | Liberal Outrage