June 01, 2003 | By Keith Martin in Washington, DC
US states are seeing monumental erosion in their tax bases because of sophisticated tax planning by large corporations. Dan Bucks, head of the Multistate Tax Commission, said in a speech in May that the largest corporations have an effective rate of 20.9% compared to 30.9% for companies in the next tier. Bucks said two techniques that are causing the biggest headaches for states are transfer pricing where goods are sold between affiliates at artificial prices that shift income away from the state, and the use of an out-of-state holding company to hold patents, trademarks and other intangibles for which the in-state affiliates then have to pay royalties. The holding company is put in a state like Delaware or Nevada that does not tax the royalty income. Seven states have passed laws to deny deductions for royalty payments. Another 16 have dealt with the problem through combined reporting laws . . . . The IRS said it has issued 239 summonses to 78 promoters of transactions it considers tax shelters seeking to see the investor lists. Twenty-five of the promoters have cooperated by turning over the lists. Seventy-seven of the summonses have been referred to the US Justice Department for enforcement.