When we hear the words, “tax haven,” we generally think of offshore locations such as the Cayman Islands or Isle of Man. However, we often overlook tax havens when they are right in front of our eyes. Not only is Delaware the first state, but it is also the first offshore haven right on America’s shores.
1209 North Orange Street seems innocuous in its name, however it is the legal address of 285,000 businesses. Among them are American Airlines, Walmart, Coca-Cola, Ford, General Electric, etc. These are global companies with substantial employee bases and ubiquitous recognition. 1209 North Orange is merely a dropbox location for these businesses. Beyond these giant corporations are small start-up businesses, mom and pop shops, scoundrels, and swindlers and they all showed up to minimize taxes, dance around regulations, and perhaps cover their tracks.
A classic tax avoidance operation is through a “shell company” whereby the process of buying and selling is mitigated through an “alleged” company to disguise the actual company’s profits. It takes less than an hour to incorporate a company in Delaware and the government is so eager about business coming in, the office of its secretary of state stays open until midnight Monday-Thursday.
“Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds,” said Lanny A. Breuer, assistant attorney general for the criminal division of the Justice Department. “It’s an enormous criminal justice problem. It’s ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it.”
However, most of the businesses in Delaware are legitimate incorporations that use legal means to reduce their tax bills. Since 1792 when Delaware was ratified as the first state, many companies were lured to open business here because of its friendly corporate and tax laws.
To put in perspective how much Delaware has become a tax haven – nearly half of all public corporations in the U.S. are incorporated in Delaware. 133,297 businesses were set up in this state last year and there are currently more corporations than people living in the state (945,326 to 897,934)! Delaware has received roughly $860 million in taxes from these corporations, which accounts for a quarter of the state’s budget.
Delaware is also utilized as a tax bill reducer. The state allows companies to shift their revenue and royalties to their “holding company” where they are not taxed. This loophole has enabled corporations to reduce their tax payments by an estimated $9.5 billion. Obviously, tax officials are seeing through these evasion schemes, however there is little that can be done because most of the practices are completely legal.
What differs Delaware from the typical offshore havens like the Caymans, Isle of Man, and Jersey is its lack of transparency and secrecy. Most offshore havens require full disclosure of the company’s business, assets, debts, etc. before opening any type of account. In Delaware, you can essentially operate a business abroad and have just a mailing address in the state and receive all the tax benefits as if you lived there.
Delaware may be basking in tax income, however states like Pennsylvania are receiving the brunt end of the opportunity. Pennsylvania is claiming they are being robbed of their tax dollars. A major company involved in natural gas and drilling is said to have more than 400 subsidiaries all registered in Delaware, even though they do business in Pennsylvania. According to the Pennsylvania Budget and Policy Center, in 2004 the Delaware loophole cost Pennsylvania nearly $400 million in lost revenue in 2011.
Delaware officials are adamant about keeping the situation the same. It is hard to work around a legitimate tax haven, however if more cases of illegal practices arise, there may be more leverage to alter the state’s tax structure. For now, 1209 North Orange Street will remain America’s biggest tax haven.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.