The End of Delaware Being a Tax Haven Finally at Hand?

February 27th (Wilmington, DE) – During the State of the Union, the President asked Congress to “close the Delaware Loophole” and level the playing field between States for attracting and retaining businesses.

Background: The Delaware General Corporation Law—as the directive that contains the loophole is officially known—allows companies to evade taxes on “intangible assets”. This includes items like patents, trademarks, copyrights, and other “goodwill”, i.e., the value of the brand name. Additionally, this could encompass possessions like electronic databases, notably financial systems and customer lists. Basically, whatever is not “tangible”, such as land, a building, equipment, or any other physical possessions.

More benefits: There are a host of other potential advantages, including companies being able to charge themselves royalties and not pay taxes on those fees. For instance, McDonalds keeps their trademarks in Delaware and bills their franchises and corporate stores around the country for use of their name and mascots, but never pays any taxes for those charges.

Why it matters: Due to this setup, billions of dollars in tax revenue are lost every year both in the States where these companies have a real presence and to the federal government. Other States cannot compete with this tax shelter without severely undermining their own collection systems and harming citizens. Many companies have manipulated this methodology to have a zero percent tax rate in other States where they have a physical location.

Of note: Hundreds of thousands of businesses, including 80% of all public corporations, have made Delaware their “home” in order to attain these unwarranted gains. This is despite the fact that a majority of them have absolutely no employees there and count the Corporation Trust Center—a small, two-story office building in Wilmington—as their base of operations.

The Plan

In order to close the loophole, the President has recommended Congress pass a piece of legislation that covers these three areas:

1. Should a company larger than a certain size (to avoid impacting small businesses and sole proprietorships) want to have a “location” anywhere, it would need to have a unique, dedicated space that only they use, which must be manned by at least one full-time employee. This would mitigate the current practice used by hundreds of thousands of organizations that simply set up a mail drop in a small building. Even those that choose to remain in Delaware would be required to get a local office space of their own and have at least one employee cover the space.
2. In the same vein, a company would be required to have a “primary mission” location in the same State that they register their company. For instance, if your company sold widgets, it would need to have some type of facility also in that same State that either manufacturers or sells those widgets, or provides support services (i.e., finance, IT, sales and marketing, etcetera) necessary for the development of those widgets. They could not just incorporate in that State for the benefits while keeping all main functions elsewhere.
3. Finally, the President wants language to be created that states tangible and intangible assets, royalties, and related charges must all be treated equally under tax law. This would seemingly make it impossible to have a zero-percent tax rate as even the most corporate-friendly States would still want to charge a company located there something.

Likelihood of Action

Yes, but: This is all easier said than done. State and federal legislatures have tried for decades to close the Delaware Loophole to no avail. Many compromise bills have been watered down and thus have limited the intended effect. Further, corporate-hospitable States are reticent to give up what little competitive advantages they have over their neighbors.

Other issues: A few States like Nevada have tried to replicate much of Delaware’s scheme in order to lure companies in and encourage them to set up shop there instead, hoping that volume would make up for the difference lost in individual earnings. They might see these proposals as an attack on their nascent strategies.

One more thing: The President asked the single Representative and two Senators from Delaware to “put on your earmuffs for the next few minutes” before launching into the introduction of this concept.

Go Beyond

• Biden personally uses tax loophole that Obama administration tried to close
• Hilary Clinton and Donald Trump each have a corporate address at this building in Delaware
• PA politician who campaigned on closing the “Delaware Loophole” is in hot water for using it

The above piece is an excerpt from the speculative fiction novel 254 Days to Impeachment: The Future History of the First Independent President by J.P. Prag, available at booksellers worldwide.

Learn more about author J.P. Prag at www.jpprag.com.

254 Days to Impeachment is a work of mixed fiction and nonfiction elements. With the fiction elements, any names, characters, places, events, and incidents that bear any resemblance to reality is purely coincidental. For the nonfiction elements, no names have been changed, no characters invented, no events fabricated except for hypothetical situations.