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Mo. tax loophole under fire

Tuesday, September 9, 2003 | 12:00 a.m. CDT; updated 8:59 a.m. CDT, Sunday, July 20, 2008

JEFFERSON CITY — Its namesake may be cute and lovable, but the “Geoffrey Loophole” has elicited sharp opinions.

The non-Missouri source income and intangibles tax, better known for the nickname derived from the Toys“R”Us giraffe mascot, exempts some large Missouri corporations from paying state income taxes.

Gov. Bob Holden has called for its repeal, but Republicans say he is driving businesses away from Missouri.

Speaker Pro Tem Rod Jetton, R-Marble Hill, has said Republican lawmakers are using carrots to attract businesses to Missouri, whereas Holden’s proposals are sticks that scare them off.

“That’s a myth,” Holden’s spokeswoman Mary Still said. “There are no reports of any losses of Home Depot or Toys‘R’Us (outlets). Where are they going to go?”

Twenty-five other states have eliminated the loophole from their own tax codes. None of those states have lost businesses because of the measures, a report from Holden’s office states.

The “Geoffrey Loophole” essentially allows Missouri corporations to transfer their income to parent companies based in states that do not have income taxes. Subsidiaries in Missouri are charged by their parent companies to use intellectual property such as patents, trademarks and corporate logos. These charges transfer the bulk of a subsidiary’s income to its parent company. This allows parent companies to do business in Missouri without paying income taxes in the state.

Holden says eliminating the loophole will earn $23 million in revenue, “every penny of which” would be put toward public education.

Republicans have decried Holden’s proposal to close the loophole as not only detrimental to Missouri business but also an undue tax burden on Missouri citizens.

“My understanding is that he’s calling on the General Assembly to raise taxes on hard-working Missourians to the tune of $40 million,” House Majority Leader Jason Crowell, R-Cape Girardeau, said of Holden’s proposals.

Holden’s office counters that the bill unfairly taxes some Missouri companies while outsider corporations pay no income tax.

“It’s a tax shelter unfair to Missourians,” Still said. “Mid-City Lumber and RE/MAX in Columbia can’t compete with these companies that don’t have to pay taxes.”

The Missouri Chamber of Commerce is examining Holden’s language to see that it adequately differentiates between legitimate transactions and tax shams.

“The devil is in the details,” said Ray McCarty, director of fiscal affairs for the Chamber. “It’s a question of how much they are charging.”

The Chamber of Commerce opposes Holden’s language as is, but supports such tax credits if the parent company charges an adequate cost for its intellectual property so that the company is not simply transferring income. Parent companies should charge to inside companies what they charge to outsiders, nothing more, McCarty said.

McCarty also said the loophole does not hurt small businesses, but that small businesses have unfairly taken advantage of such loopholes.

“I know of one individual who started a corporation” and exploited the loophole, McCarty said. “This is not a case of big business versus small business.”

Whatever happens to the “Geoffrey Loophole,” the Toys“R”Us mascot may never be seen the same way again.

“Tax laws are evolving creatures,” Still said.

So too, it appears, are giraffes.


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