Florida tax laws and intellectual property
Whole Foods has been using its intangible holding company to reduce its income tax payments in various states for more than 15 years. It had been paying at least some income tax in Florida until last year, when Whole Foods Markets IP sued the Florida Department of Revenue, demanding a refund of all the income taxes it paid the state between 2011 and 2014. Whole Foods — which was bought in 2017 by Amazon, which is known for its aggressive tax strategies, says in the lawsuit that it “became aware that it did not lawfully owe any” Florida tax on its royalty income. Its holding company had paid the state more than $1.4 million in tax over the four-year period, or about $350,000 annually.
Whole Foods bases that claim, in large part, on a court case the state of Florida lost in late 2011 that exposed what a judge called a loophole in state law.
When crafting the original 1971 corporate income tax law, the Legislature instructed companies to exclude royalties from their sales calculations, partly because it could be difficult to determine a physical location for intangible property. But they made an exception for the mining industry because those royalties could easily be tied to a physical location.
But now companies that have created these holding companies argue that the Florida Legislature clearly only intended to count royalties when taxing mining companies.
The argument has been tested exactly once in a Florida court — in a case involving Circle K. The convenience store chain, which used an intangible holding company to avoid $3 million in Florida taxes over a three-year period, won that case in December 2011 because of the mining industry provision.
Since the Circle K ruling, further litigation has turned up more companies using the strategy in Florida. For instance, the packaged food giant that once combined both Kraft Foods, the maker of macaroni and cheese, and Mondelez International, the maker of Oreo cookies, used an intangible holding company to avoid nearly $2.6 million a year in Florida income taxes between 2008 and 2012.
Meanwhile, Aaron’s, the furniture, appliance and electronics rental company, cut its Florida tax bill by more than $100,000 a year between 2003 and 2011. Even before the Circle K case, litigation revealed cigarette maker Reynolds American avoiding more than $1.1 million a year in Florida taxes, Microsoft avoiding more than $800,000 a year and Best Buy avoiding about $600,000 annually. All of the cases were settled.
Technically, the Florida Department of Revenue maintains that these kind of royalty payments are taxable under existing state law. But the reality is that the agency is virtually powerless to stop it. Documents produced in the Circle K case showed that the department was regularly settling audit disputes over the use of intangible holding companies for 30% or less of the amount of tax in dispute. Tax attorneys say the agency’s “recovery rate” has shrunk even further since the Circle K decision.
The Florida Legislature could stop companies from using this tax strategy by adding language clarifying that it is not only mining companies that must count royalties when calculating their income taxes.
More broadly, some other states have enacted “add back” laws in which companies can be required to add back any deductions they have taken for royalties paid to their own holding companies.
And earlier this year, New Mexico became the 28th state — plus the District of Columbia — to adopt what’s known as “combined reporting” or “unitary reporting,” which requires companies to file a single, comprehensive tax return for all their subsidiaries when they calculate their taxes. The goal is to eliminate the impact of large companies moving money between subsidiaries — whether that takes the form of royalties paid for the right to use trademarks, interest paid on internal loans, management fees or any other form of transfer payment.
Florida, by contrast, remains a separate return state, allowing companies the option of filing different tax returns for different subsidiaries.
“Florida is definitely a laggard,” says Michael Mazerov, a senior fellow at the Washington-based Center on Budget and Policy Priorities, which supports combined reporting.