Copper Tarnished, but Collar Holds

By Bob Decker
January 11, 2009

One of the linguistic misfortunes of Montana’s history is that the state’s infamous “copper collar” is not remembered by the more accurate – and still relevant – term, “corporate collar.” Copper, after all, was merely the medium through which elite, often out-of-state interests controlled Montana’s people, institutions, and landscapes during the time when the Richest Hill on Earth fueled the electrification of the world.

Corporate power is nimble, however, and has no particular allegiance to copper. That corporate nimbleness is not just in the marketed product: it has been developed to near perfection in the art of taxation, or, too frequently, non-taxation.

With the purpose of loosening the corporate collar in Montana, Sen. Ron Erickson (D-Missoula) introduced Senate Bill 36 to the Senate Tax Committee on January 8. His bill would alter Montana’s tax law to make it more difficult for corporations that earn income from various states and nations to use foreign-based subsidiaries to unfairly reduce their tax burdens in Montana.

Most people understand the general concept behind the “off-shore tax haven” and disapprove of its purpose, but the accounting and tax laws that have been developed in many states and countries to assure fair distribution of corporate tax payments among entities is complex. It requires a concerted and continuous effort for taxing jurisdictions to keep pace with the imaginative competence of corporate accountants and attorneys.

“What has happened,” said Sen. Erickson, “is they (corporate tax attorneys) have found a way to turn domestic income into foreign income.”

Sen. Erickson distributed news reports to make his case:

• In a Wall Street Journal article from November 2007, Wal-Mart was described as paying rent on its stores to a wholly owned subsidiary based in Florence, Italy. This allows Wal-Mart to write off rent payments in its stateside tax forms, but retain the same payments through its Italian office and avoid many corporate taxes in the U.S.


• In the same WSJ article, Burlington Northern Santa Fe is reported to have made interest payments to subsidiaries doing business in Canada. The railway deducted the interest but didn’t pay taxes on most of the income received by its subsidiaries.


• From Finfact Ireland (an Irish business and finance website), November 2005: “Earlier this month, The Wall Street Journal wrote that ‘a law firm's office on a quiet downtown street [in Dublin, Ireland ] houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004.’"

The fiscal note for Sen. Erickson’s bill estimates that the bill’s passage would increase tax revenue to Montana’s general fund by $2,400,000 annually. Not an earth-shaking number, but certainly large enough to deserve serious attention in a state budget environment where revenue estimates are dropping almost monthly.

At the hearing before the Senate Tax Committee, Mike Green, representing the Montana Taxpayers Association, opposed the bill as a “shotgun approach” that would increase tax compliance costs for corporations. When queried by a committee member about that assertion, Brian Staley, an attorney for the Montana Department of Revenue, said that, to the contrary, Sen. Erickson’s proposed change would make it easier to comply with state law by making it more closely resemble federal law.

The Senate Tax Committee took no action on the bill. We’ll report on future developments.