On Dec. 21, 2005, three months after the levees broke in New Orleans, President George W. Bush signed into law the Gulf Opportunity Zone Act of 2005, a multibillion-dollar relief package aimed at helping people and businesses devastated by Hurricanes Katrina, Rita and Wilma.

Among the law’s provisions was a tax break to help struggling businesses from Florida to Texas avoid laying off workers. The law allowed companies to claim “employee retention” tax credits against their corporate income taxes. The credit was worth 40% of the first $6,000 in wages paid to each worker hired before the end of 2005 — a tax savings of up to $2,400 per employee.

One of the businesses that took the help was HCA, the Nashville, Tenn.-based hospital and health care services concern. Records show that HCA claimed $8.9 million in hurricane-relief credits on its 2005 federal tax return.

HCA then deducted the full $8.9 million as a labor expense from its Florida state income taxes, as well — even though only $269,010 of those wages, or about 3%, were paid to employees who actually worked in Florida.

The tactic lowered HCA’s 2005 Florida tax bill by more than $110,000 — a tiny savings for a company that earned $1.4 billion in profit that year. But it was just one of many strategies HCA has used to trim tens of millions of dollars from its Florida tax bills.

Those strategies have led to a tax war that HCA and the Florida Department of Revenue have been fighting for more than a decade. HCA believes it’s acting within the law; the state Department of Revenue contends that HCA distorts its tax bill and continually underpays its Florida taxes.

Since 2001, HCA has sued the state Department of Revenue at least nine times; six of the cases — covering roughly $20 million in disputed taxes — were settled in 2012. The three remaining suits — one filed in 2012, two in 2015 — comprise one of the largest and most complicated tax disputes in recent Florida history. More than $60 million is at stake, not including potential interest and penalties.

HCA declined to make anyone available to discuss the litigation or its tax-planning techniques. In a prepared statement, the company noted that it pays a lot of taxes in Florida in an industry where many of its competitors — including publicly owned and not-for-profit hospitals — don’t pay any income tax at all.

“The majority of hospitals in Florida don’t pay any state income tax, and from 2001 through 2012, HCA’s Florida hospitals paid $212 million in state income tax and more than $2.2 billion in all state and local taxes,” the company said. “During that time period, HCA hospitals also provided more charity care, uninsured discounts and other uncompensated care — at a cost of more than $4 billion — than any other hospital system in Florida.”

Indeed, HCA is among the largest corporate taxpayers in Florida. On its original Florida tax return in 2006 — the most recent year for which detailed figures are available in the court records — HCA paid nearly $13.3 million in state corporate income tax. That represented 0.6% of the entire $2.5 billion in corporate taxes the state collected during its 2006-07 fiscal year, even though HCA was just one of about 40,000 taxpayers who paid some amount of corporate income tax that year.

The entire health care and social assistance sector — which includes HCA — owed just $29.4 million in Florida corporate taxes in 2006, according to Department of Revenue data. (Roughly one-quarter of HCA’s total revenue today is generated by facilities in Florida, according to regulatory filings.)

Much of the conflict arises out of the company’s complex corporate structure. HCA’s 2006 tax filing, for example, covered 798 different corporate entities. Many were individual hospitals and surgery centers, often held in standalone limited liability companies or partnerships.

Other subsidiaries included physician practices, pharmacies and mental health clinics, and businesses that encompass family services, real estate, corporate holdings, insurance, finance and investment and computer management.

The different nature of those businesses means the company is subject to a variety of tax laws. And HCA exercises plenty of latitude in how it interprets them.

Consider the way the company calculates taxes related to “Healthcare Indemnity Inc.,” an insurance subsidiary that HCA established to sell medical liability coverage to HCA hospitals, surgery centers and doctors.

Like other insurance companies, Healthcare Indemnity invests the premiums it receives from policyholders, including some investments in securities. HCA argues that — because investing in securities isn’t a core part of the company’s business — the profit that Healthcare Indemnity makes from those investments shouldn’t be considered regular business income. Instead, HCA classifies it as “non-business income,” for which there are different tax rules.

The effect is to move a big chunk of profit beyond the reach of Florida taxes. On its initial 2006 tax bill, HCA classified half of Healthcare Indemnity’s investment earnings as nonbusiness income, according to court records. A summary written by the Florida Department of Revenue as part of the case suggests that the tactic allowed HCA to shield about $150 million in profits from Florida tax, saving the company just under $2 million.

In a subsequent audit, the Department of Revenue disallowed the move, declaring that investing in securities was a core part of Healthcare Indemnity’s business as an insurance company and that its investment returns were regular business income.

HCA responded with an amended tax return more aggressive than the original return, declaring 100% of the money “non-business income” and demanding a refund for the taxes it paid based on the original.

Another HCA subsidiary is Western Plains Capital, which Department of Revenue auditors say functions like an internal bank that lends money to other HCA companies. Western Plains was holding at least $20 billion of notes receivable from other HCA entities at the end of 2005, according to the lawsuit records.

The Department of Revenue and HCA have decidedly different views on those notes receivable and also what kind of business Western Plains is.

A company’s corporate income tax burden in Florida depends in good part on what percentage of its profits it earns in Florida. And that calculation is based partly on what percentage of the company’s property is in Florida.

Florida’s tax laws require most companies to ignore intangible property — including notes receivable — when calculating the percentage of their total property in Florida. But the rules are different for companies like financial institutions, since most of their property is intangible.

The Department of Revenue claims that Western Plains Capital should not be treated as a financial institution because it only works with other HCA companies.

But HCA argues that Western Plains Capital is a financial institution and, therefore, its debt should be counted as property. Furthermore, since most of that debt originates outside of Florida, HCA believes it should be able to reduce, for tax purposes, the percentage of the company’s total property that is in Florida — and thus the percentage of its profit that the state of Florida can tax.

In an amended return filed for its 2006 tax year, HCA was able to use Western Plains Capital’s intangible property to reduce the percentage of its profits that can be taxed by Florida — also known as its “apportionment factor” — by more than 2.9 percentage points. That equaled a state tax savings of nearly $2.9 million.

Some of the other tax disputes between the Department of Revenue and HCA have involved entities such as HCA Management Services and All About Staffing. Those companies, the department says, are HCA subsidiaries that sell various services to HCA hospitals. HCA Management Services provides management services; All About Staffing supplies nurses, charging each hospital a sum comprised of each nurse’s hourly rate, the cost of their benefits and a markup to cover overhead.

Hospitals within the company’s network are required to use some of these services: In a letter to the Department of Revenue sent in 2007, HCA said it has all of its hospitals sign both man-agement services agreements and contribution agreements. Many must also sign employeeleasing contracts. Records indicate that in some years HCA subsidiaries have paid more than $3 billion to related entities in the form of “management fees” and employee leasing payments.

Just as with Western Plains Capital, HCA has used these payments to dilute its Florida apportionment factor by classifying the majority of those management fee and employee leasing payments as “sales” occurring outside of Florida.

In 2004, for instance, HCA filed an amended tax return in which it was able to lop off nearly 3. 4 percentage points from its Florida apportionment factor, primarily by including such intercompany payments. That equated to a tax savings of approximately $2.7 million, according to the documents, which reveal a circuitous corporate structure. The HCA hospitals pay management fees to HCA Management Services. HCA Management Services is owned by a company called Healthtrust, also a subsidiary of HCA. Healthtrust, in turn, is also the sole member in some of the limited liability companies that own many of the HCA hospitals.

HCA has used a number of other tactics to minimize its taxes. Florida, for example, allows companies to subtract profits earned in other countries before calculating their state tax bills. HCA, which has some operations in Europe, has in some years subtracted a larger amount of foreign income from its Florida tax return than the total amount of foreign income it has reported to the federal government in federal tax filings. HCA argues that the calculations used for each should be different.

HCA also uses federal tax credit programs to lower its state tax bills. Florida’s corporate income-tax law allows companies to take a deduction on wages that it can’t deduct on its federal return if the wages are covered by federal tax credits. But a company is only supposed to take the Florida deduction for wages paid “within this state.”

According to correspondence with the Department of Revenue, attorneys for HCA at one point argued that the phrase “within this state” does not refer to just Florida — it actually means within any state. HCA, according to the Department of Revenue correspondence, has been deducting the full amount of wages it has paid through various federal tax credit programs, regardless of where in the country those employees work.

In addition to the hurricane relief credits, the documents show that HCA has used the same strategy to expand its state tax savings through federal programs meant to encourage companies to create jobs in poor communities, hire unemployed workers currently receiving welfare benefits and offer child care to employees.

No amount is too small: On its 2005 Florida return, HCA deducted $8,874 worth of credits through the federal “Indian Employment Credit” program. Florida auditors later said there was no evidence that any of those wages were paid to Native American workers in this state.

For its part, HCA argues in the lawsuits that restricting the deduction to only Florida workers unconstitutionally discriminates against companies with workers in multiple states.

The Department of Revenue declined to make anyone available to discuss the litigation with HCA and also will not say whether the strategies the company uses are unusual or used by other companies.

“We do not comment on tax-planning techniques or their use by taxpayers,” DOR spokeswoman Renee Watters says.

Tax experts interviewed by Florida Trend, including professors and practicing tax attorneys, said HCA’s strategies to reduce its taxes are sophisticated, aggressive — and similar to those used by many other Fortune 500 companies.

Kirk Stark, a professor of tax law and policy at the University of California Los Angeles, says multistate companies, as they prepare their returns, face 50 different sets of laws and 50 dif-ferent court systems that interpret those laws. Attempting to pay as little tax as possible in each state’s system may lead to varying and even contradictory interpretations of tax laws, Stark says, depending on the state in which a company is filing its taxes.

“In some ways, it’s sort of a wild, wild west,” Stark says. “You have a legal landscape that is a little more susceptible to this kind of game-playing.”

Meanwhile, the battle between the state revenue department and HCA is likely to persist. HCA uses many of the same tax strategies year after year, meaning that “the issues raised in this case are likely to recur in the future,” the company wrote in a legal brief filed in November in a circuit court in Tallahassee. “These are longstanding, bona fide disputes between the parties as to the proper determination of HCA’s Florida income tax liability for prior and future periods.”

HCA’s 2006 Florida Tax Bill

HCA is one of the largest and most complex corporate taxpayers in Florida. Here’s a look at some of the details from the company’s initial 2006 state tax return, which was filed Sept. 29, 2007.

When ‘a Fix’ Isn’t a Fix

Some corporate-tax reforfm advocates in Florida have for many years been calling on state lawmakers to enact a policy referred to as “combined reporting” that they believe would help prevent multistate and multinational companies from using intercompany transactions to avoid taxes. But as the HCA case shows, that may not necessarily be effective.

Right now, Florida allows companies with multiple subsidiaries to choose how they want to file their taxes: They can submit individual returns for each of their various entities in Florida or turn in a single, consolidated return combining the results for their entities. The separate-reporting method is vulnerable to certain types of tax-planning strategies. One common approach, for instance, is for a company to move all of its logos and trademarks into a separate holding company and then have its operating businesses pay royalties to the holding company for the right to use the trademarks. The operating business can then deduct those payments as an expense when calculating its Florida tax bill, while the holding company never files any Florida return at all.

Combined reporting would eliminate that choice and make all companies file a consolidated return. But HCA already voluntarily files a consolidated return in Florida. The company is still using internal transactions to create sales that it classifies as outside of Florida. But instead of reducing the overall profit figure, those sales are reducing the percentage of that profit that can be taxed in Florida.

It’s not clear how widespread the technique is. But accountants at financial services giant Deloitte, in an advisory to clients issued this past summer, noted that combined reporting can create an “ability of a taxpayer to include related corporations that dilute the state apportionment factor and, as such, reduce the portion of the taxpayer’s taxable income apportioned to the state.”

Calculating Florida Corporate Income Tax

Calculating a company’s Florida income-tax bill is a multistep process.

1 Calculate the company’s “adjusted taxable income.” This is derived by adjusting the company’s total taxable profit reported to the IRS using various additions and subtractions allowed (or required) under Florida law, such as the deductions for profits earned in foreign countries.

2 Determine the percentage of profit that was earned in Florida — the “apportionment factor” — based on the percentage of the company’s sales, property and employees in the state. States can only tax income earned within their borders.

3 Calculate the company’s total Florida profit by multiplying the adjusted taxable income by the apportionment factor. That profit figure is then adjusted with a few more deductions and additions.

4 Calculate the gross tax bill — 5.5% of the adjusted Florida profit.

5 Then apply whatever tax breaks or credits the company qualifies for to calculate the firm’s total tax bill.