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Aggressive Taxation Threatens Incorporation Goose

            Aggressive state actions on Corporate Franchise Fees and Abandoned Property collection on out-of-state companies may kill the Golden Goose that is providing one-third of state revenue in Delaware. The Markell Administration has already increased collections and is asking for more for a net increase of $300 million, or 27% since 2009.  Meanwhile, Nevada and North Dakota are challenging Delaware’s longstanding monopoly as the place to incorporate.
            Delaware has had favorable incorporation laws led by the Chancery Court that protects corporate and share holder interests. A large percentage of Corporations and Limited Liability Companies have incorporated in Delaware even if they don’t do business here. They pay an annual franchise fee to maintain their corporate status. The fees have already increased $110 million from a 2010 rate change, and the Governor has asked for another $51 million increase this year for a total increase of 24%. 
            In addition, a Supreme Court ruling found, for corporations, the state of incorporation should hold any unclaimed or abandoned property. Abandoned property consists of things like unclaimed stock, dividends, dormant bank accounts, and un-cashed paychecks. States are supposed to hold the property until claimed by a rightful owner as a consumer protection. As little as 5% of abandoned property is ever returned to the rightful owners and the rest goes into the state’s general fund.
            The state decided to get aggressive in collecting abandoned property unleashing audit firms operating on fees “contingent” on collection to create “estimates” of what was owed that had no relationship to reality. The state tacked on large fines and interest while demanding full audits going back 30 years if a company contested the bill. The audits could be more expensive than the bill, and most companies didn’t have the records anyway so they negotiated large payments. Collections rose over 45% from 2009 to 2013 to $567 million.  How long do you think companies will accept this kind of blackmail?
            The issue has gone national with an article in Forbes Magazine March 21, by Douglas Lindholm, President & Executive Director of the Council On State Taxation. The organization gave Delaware an “F” grade on its unclaimed property law and reported one law firm, Kelmar, collected $30 million for audits conducted on a contingent fee basis in just one half of 2012. Lindholm suggests Delaware allow all audited firms participate in a Voluntary Disclosure process recently developed by the Secretary of State, establish a statute of limitations, abolish contingent fee audit contracts, and exempt transactions between businesses. Nevada is already follows parts of this prescription. CRI also suggests the state back off the proposed tax increase.
            We know the next question will be where will the money come from to run the government if we don’t raise taxes. Here’s a novel idea: cut spending! Ideas have been on the table for years that could save over half a billion dollars a year:
·         -Allow state employees to retire early if they can show how to eliminate their job and don’t replace them
·         -Bring state employee benefits into line with private industry
·         -Determine a real and fair prevailing wage for state highway and school contracts by using the US Bureau of Labor Statistics survey which has five times the number of responses as the state survey
·         -Switch from mandatory sentences for crimes to mandatory time served and give judges back discretion on sentences
·         -Establish co-pays for Medicaid patients especially for emergency room visits, and end coverage for employed adults with no children like the rest of the country
            If we lose our advantage as the incorporation destination we will not get it back. Let’s not wait for incorporation revenue to collapse before we make preventative changes.

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