Tax loophole is a sore spot for states

NEW ORLEANS (AP) -- The "Geoffrey Loophole," named after the familiar giraffe mascot of Toys "R" Us, is no fun for state taxing authorities.
Under the loophole, local outlets of large national chain stores pay royalties to sister companies in other states, claim the payments as business expenses that are deducted from state income taxes.
It's difficult to determine how much the states are losing each year. But it's a sore spot with states trying to balance budgets.
The Maryland Legislature voted this year to prohibit companies doing business in Maryland from transferring part of their profits to holding companies chartered in Delaware, where the money is not taxed. Gov. Robert Ehrlich allowed it to go into law without his signature.
For the second straight year, a proposal to close the loophole failed in Missouri. While the Republican-led Legislature and Democratic Gov. Bob Holden both said the loophole should be closed, they could not agree on how to do it.
The Multistate Tax Commission, which studies state tax issues, estimated that various corporate tax shelters, including the Geoffrey loophole, cost states between $3 billion and $7.1 billion in 2001.
According to the Washington-based Center on Budget and Policy Priorities, 16 states have adopted a reporting system that treats related corporate entities as one, using a formula to figure the amount of in-state taxable income.
Other attempts to close the loophole have failed in Rhode Island, Pennsylvania, Tennessee, Texas and Wisconsin, the center said.