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'Delaware loophole' in Pennsylvania tax law appears doomed

| Tuesday, July 2, 2013, 12:01 a.m.

State lawmakers moved closer to eliminating the so-called “Delaware loophole” that allows some businesses to skirt their share of state taxes.

The Delaware loophole refers to the legal but questionable deductions multistate companies operating in Pennsylvania take to avoid paying state corporate income taxes.

For instance, a store operating in Pennsylvania can claim expenses paid to its parent or affiliate, usually based in tax-friendly Delaware, for using the corporate trademark. While technically legal, it seemed designed to allow the local store to avoid or minimize its Pennsylvania taxes.

The state Senate passed a bill on Sunday evening to close the loophole. The bill was in the House Rules Committee late Monday and was expected to pass the full House later during in night or on Tuesday, said policy center director Sharon Ward.

“This legislation makes utilization of the Delaware loophole in Pennsylvania illegal,” said Todd Brysiak, executive director of the House Republican policy committee. He said at least 20 other states have a similar law.

The Pennsylvania Budget and Policy Center estimates the state would recover at least $50 million a year in additional tax revenue if the Delaware loophole is closed.

“The (legislation) for the first time gives the revenue department the authority to disallow deductions,” Ward said.

“Disputes will be over whether a particular transaction had as its primary purpose the avoidance of taxes,” she said. “We'll have to see how the law's implemented.”

The bill also delays the phase-out of the state's capital stock and franchise tax until January 2016 from the previously scheduled January 2014. Pennsylvania is the only state with this tax and a corporate net income tax.

The complex tax, a levy based on a company's book value and its income, raised $837 million in tax revenue in the fiscal year ended June 30, 2012.

“Lawmakers like to see how they can keep something around a few more years as a way to balance the budget,” said Nate Benefield, director of policy analysis for the Commonwealth Foundation, a conservative policy group in Harrisburg. He noted the tax was supposed to have been phased out in 2009.

Thomas Olson is a Trib Total Media staff writer. He can be reached at 412-320-7854 or at tolson@tribweb.com.

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