June 2011 Archives

Amazon’s Anti-Tax Crusade

When large companies complain about taxes, they are usually talking about levies they have to pay out of their own deep pockets. Amazon.com is engaged in a battle to make it easier for its customers to avoid paying their taxes – their sales tax, that is, on what they purchase from the giant online retailer.

The outcome of this dispute will have broad consequences for a U.S. economy in which state and local governments face ongoing revenue shortfalls and commerce increasingly takes place online.

At the center of the dispute is the question of whether web-based retailers such as Amazon have the same obligation as brick-and-mortar stores to collect sales tax from their customers. Sales taxes are essential to the finances of state governments, accounting for nearly half of all their tax revenue. Widespread corporate income tax dodging and business property tax breaks have made the sales levy all the more important.

While traditional retailers have no choice about collecting the sales tax mandated by state and local authorities, the story is more complicated when it comes to e-commerce. A 1992 U.S. Supreme Court opinion barred states from requiring catalogue and internet sellers to collect sales tax unless they had a physical presence (“nexus” in legalese) such as a distribution center in the customer’s state. The argument was that forcing merchants to keep track of varying tax rates across thousands of jurisdictions was too onerous.

That ruling, which was handed down before Amazon.com was founded, did not mean that online transactions were tax-free. Many states require residents to voluntarily report their online purchases and pay taxes directly to the government. Most people are unaware of these rules or choose to ignore them. The failure of online retailers to collect taxes thus results in revenue losses that a University of Tennessee study estimates will reach $11 billion next year.

The Supreme Court hinted that a solution to the problem should come in the form of federal legislation sanctioning sales tax collection on remote transactions along with efforts by the states to streamline and simplify their sales tax practices. Progress on these fronts has been slow.

As people spend more and more of their money in cyberspace, some states feel they cannot wait. They have been devising creative ways to establish nexus. New York led the way in 2008 with legislation, dubbed the “Amazon law,” that requires online retailers to collect taxes if they have affiliate websites in the state promoting sales on their behalf. A few other states followed suit in 2009 and 2010.

This year the issue has mushroomed. More than a dozen state legislatures have taken up the matter, and Amazon laws have been enacted in Illinois, Connecticut and California. Amazon is furious. It responds to the new laws by vowing to terminate its relationship with affiliates in the affected states and by threatening legal action.

The company’s aversion to sales tax collection is so strong that it carries over into states in which it should have a nexus obligation. As Michael Mazerov of the Center on Budget and Policy Priorities points out, Amazon has put ownership of its physical facilities in the hands of subsidiaries and then claimed there was no basis for the parent company to collect taxes. When that has not worked, the company has sought special exemptions by what amounts to bribing the state with promises of job creation. Such an effort just failed in Texas, but Amazon prevailed in a drawn-out dispute in South Carolina.

In early June, South Carolina legislators reversed themselves and approved a bill that gives Amazon a five-year exemption from its sales tax collection duties. The move came after the company upped to 2,000 the number of jobs it promised to create in the state in the course of building a $125 million distribution center. Amazon had also been offered subsidies such as income tax credits and property tax breaks, but it is significant that the sales tax collection issue was the deal breaker for the company.

Despite all evidence to the contrary, Amazon claims that its opposition to collecting sales tax is not driven by a desire to gain a price advantage over its competitors. Instead, the company insists that collecting sales tax in every state would be excessively burdensome.

It would be one thing for that claim to be made by a mom-and-pop operation. But this is Amazon—the online service that not only sells its customers a vast array of merchandise but also anticipates what they may want to purchase by offering an endless stream of targeted recommendations and by listing what customers who bought a particular item also purchased.

A company that has the computing power to predict the consuming habits of each of its tens of millions of customers could easily handle a few thousand different sales tax rates.

At stake are not only Amazon’s convenience and state revenue loss. By taking a hard line on sales tax collection, Amazon is contributing to the anti-tax sentiment that is doing so much harm to the country. Everyone likes a bargain, but it should not come at the expense of revenues needed to sustain vital public services.

Corporate America’s Paid Holiday

According to the old saying, insanity can be defined as doing the same thing repeatedly and expecting different results. But what do you call corporate executives who want the country to adopt a business tax policy that has failed miserably in the past? Crazy like a fox.

Such self-serving fiscal delusion is on full display in the current push for a “repatriation holiday.” A slew of major U.S.-based corporations are proposing that they be allowed to bring home many billions of dollars in largely untaxed overseas profits and, for a limited time, pay only a fraction of the statutory rate. According to a corporate front group called Working to Invest Now in America, or WinAmerica, this is “a common sense solution that will immediately inject up to $1 trillion into our economy and provide businesses with the security and certainty they need to help get Americans back to work.”

The group should really be called ConAmerica. The corporate titans are proposing a scheme that was tried and failed miserably only a few years ago, not to mention the fact that it would reward big business for practices that already deprive the country of huge amounts of tax revenue and countless jobs.

First, a bit of background. Although the U.S. Internal Revenue Code is designed to tax corporations on their worldwide profits, it contains a provision that allows companies to defer paying domestic taxes on overseas earnings as long as they stay with a firm’s foreign affiliates.

That may sound reasonable to some, but what corporate giants designate as overseas profits actually includes disguised domestic earnings. That’s because corporate tax dodging frequently takes the form of accounting gimmicks that shift reported earnings to subsidiaries in tax haven countries like the Cayman Islands and Bermuda.

This is done in a variety of ways. A company may transfer ownership of valuable patents and trademarks to a tax haven subsidiary, which then collects royalties from other parts of the company. Earnings stripping is a similar ploy that involves bogus interest payments. And then there’s the big daddy of multinational tax schemes: transfer pricing. This is the practice of exchanging goods and services among parts of a corporation at rates that have little relation to real costs.

The objective of all these tricks is to maximize reported income in countries that subject profits to minimum taxation—or none at all. Thanks to the deferral rule, a lot less is paid to Uncle Sam. It is estimated that transfer pricing costs the U.S. Treasury more than $28 billion a year.

Having engaged in this brazen tax dodging, corporations now want the right to bring the profits back home and get another tax break through the repatriation holiday. Their complaints about the need from relief from U.S. tax rates sound a lot like those of the proverbial murder who kills his parents and then pleads for sympathy as an orphan.

What makes the chutzpah quotient of the repatriation holiday advocates even higher is that they are promoting the idea in the face of documented evidence of its ineffectiveness. In 2004 a similar big business campaign succeeded in getting Congress to enact a repatriation holiday that brought the statutory tax rate on the returning profits down to 5.25 percent for the following year only. The plan was dressed up as the Homeland Investment Act, which was part of the American Jobs Creation Act.

The 2005 tax holiday was hailed as a success by corporate apologists for repatriating some $312 billion in profits for more than 800 large companies led by pharmaceutical giants Pfizer, Merck and Eli Lilly.

What they don’t emphasize is that the plan was a dismal failure in its stated purpose of generating jobs and investment in the United States. This should not have come as a complete surprise, since Congress allowed companies to use the repatriated profits for other purposes such as acquisitions and repayment of debt. Another factor was the old problem of the fungibility of money.

According to an analysis produced for the National Bureau of Economic Research, the 2005 repatriation holiday did not lead to an increase in domestic investment, domestic employment or R&D spending. The biggest impact, the report found, was an increase in stock buybacks by corporations, which was not one of the intended purposes of the legislation.

In other words, the tax holiday was a scam. Instead of stimulating job growth, it served as yet another way for large corporations to continue shrinking their contribution to the costs of running the U.S. government that serves them so well. In fact, some of the companies that benefited most from the holiday—such as Merck—carried out large-scale layoffs of U.S. workers during the time they were bringing those profits home.

Six years later, the same misleading claims are being made for repeating the practice that did so little good. What makes this especially frustrating is that it is taking place not long after Barack Obama made the issue of deferred taxes an issue in his presidential election campaign and then sought to increase taxation of foreign profits during his first year in office. Those plans have been forgotten, and now the repatriation holiday proponents are riding high, despite estimates that the scheme would result in a loss of $78 billion in federal revenues over the next decade.

Fortunately, not everyone is being taken in by WinAmerica. Along with stalwart critics such as Citizens for Tax Justice—which calls the idea “amnesty for corporate tax dodgers”—the repatriation holiday is being attacked by newer groups such as US Uncut, whose main target is WinAmerica ringleader Apple Inc.

One of US Uncut’s slogans is “Tax Dodging. Is there an app for that?” Actually, no app is necessary as long as Congress goes on buying the tax-break snake oil of Corporate America.

Toxic Legacies

Bunker-Hill_smelter — Bunker Hill smelter circa 1984

In his novel Bleak House, Charles Dickens invented the interminable lawsuit Jarndyce and Jarndyce to satirize the dysfunctional British court system. A real-life Jarndyce case just settled in U.S. federal court illustrates the glacial pace at which hazardous waste cleanup disputes get resolved and undermines the arguments of those who want to weaken environmental enforcement.

Hecla Mining Company has agreed to pay $263 million plus interest to resolve a lawsuit dating back 20 years. In 1991 Hecla and other mining companies were sued by the Coeur d’Alene Tribe over damages to natural resources in Idaho’s Silver Valley caused by some 100 million tons of toxic mining waste released into local waterways over the decades. A smelter used by the companies caused massive lead emissions that contaminated soil and showed up at high levels in the bloodstream of local children. The federal government joined the case in 1996.

The lawsuit was filed after years of efforts by the mining companies to evade responsibility for cleaning up one of the country’s most polluted areas, which was designed the Bunker Hill Superfund site in 1983. The federal government began spending several hundred million dollars on the cleanup—costs that the lawsuit was meant to recoup. (The eventual cost would surpass $2 billion.)

The corporate defendants made that recovery process as difficult and time-consuming as possible. One company, Gulf Resources and Chemical, went bankrupt in the 1990s, leaving little in the way of assets. Another, Asarco, also filed for bankruptcy in 2005 in an apparent attempt to sidestep huge environmental liabilities around the country, but the U.S. Justice Department was later able to get the company that took it over, Grupo Mexico, to pay $1.8 billion for cleanup costs at more than 80 toxic sites in 19 states, including $436 million for the Bunker Hill site.

The new Hecla settlement is welcome news, but the fact that it has taken nearly three decades from designation of the Bunker Hill site to this financial resolution indicates there is something seriously wrong with the Superfund system (and the courts).

Ironically, the Bunker Hill story is in many ways a best-case scenario in that the federal government was able—eventually—to recover a substantial portion of its cleanup costs. In numerous cases, responsible corporate parties no longer exist or don’t have adequate assets.

Congress anticipated this problem when it established the Superfund program in 1980. It created a trust fund for the program that received revenues generated by excise taxes on two highly polluting industries—petroleum and chemicals—as well as a corporate environmental income tax. The sources boosted the trust fund balance to nearly $4 billion by end of 1996.

The authority for these “polluter pays” taxes expired in 1995, and the balance began to dwindle, reaching zero in 2004. In recent years, Congress has kept the fund alive through modest appropriations, but these are subject to political whims.

Last year the Obama Administration called for reinstatement of the Superfund tax, giving a boost to the lonely efforts of Oregon Rep. Earl Blumenauer and New Jersey Senator Frank Lautenberg. However, given the current composition of Congress, that proposal seems to be going nowhere.

Unfortunately, the choice is not simply between a Superfund program financed by polluting industries and one funded by the general public. If some conservative groups had their way, the Superfund program would be eliminated outright or weakened by transferring responsibility to the states.

Think how that would have played out in Idaho, where state officials kept their distance from the Bunker Hill case until the last minute, when they signed on to get a cut of the money from Hecla. For years, those officials (along with members of the state’s Congressional delegation) vilified the Environmental Protection Agency for aggressively pursuing the Bunker Hill cleanup while they said little about the companies that caused the mess.

That anti-EPA attitude is, alas, all too common today among corporate apologists both in Washington and in many states. The Superfund program, for all its limitations, remains one of our main tools for dealing with the legacy of corporate environmental irresponsibility. It needs to be on as firm a footing as possible.

Fighting Unions in Bizarro World

bob-king — UAW President Bob King (left)

Some right-wingers in Congress appear to be envious of their state counterparts who have been attacking labor rights in legislatures across the country.

They were given an opportunity to engage in some union-bashing of their own at a recent hearing of the House subcommittee on Health, Employment, Labor and Pensions, known as HELP.

The Right is already up in arms about a National Labor Relations Board complaint charging Boeing with shifting work from its unionized operations in Washington State to union-unfriendly South Carolina to retaliate against worker activism. Now HELP chair Phil Roe of Tennessee is accusing the Board of making it easier for unions to use corporate campaign tactics against employers.

Roe and other panel Republicans seem to be living in a parallel universe in which large numbers of companies are forced to their knees by ruthless corporate campaigns, and workers suffer from intimidation not from anti-union employers but from labor thugs who will stop at nothing in their organizing efforts.

The depiction of this bizarro world was aided by the choice of witnesses at the hearing. There were, of course, no union representatives. Instead, the panel included the president of a janitorial company in Indiana that had been targeted by the Service Employees International Union; a contractor from New Mexico representing the anti-union Associated Builders and Contractors; and a partner in the law firm of Morgan, Lewis & Bockius, which is infamous for its work in opposition to organizing drives.

The only shred of legitimacy came from the one other witness—Catherine Fisk, a law professor from the University of California-Irvine—whose testimony documented the legal justification for the tactics that make up corporate campaigns. But she was mainly ignored by the subcommittee Republicans, who spent most of their time lavishing praise on the two business owners, especially the janitorial executive, David Bego, who has self-published a book about his struggle with the SEIU entitled THE DEVIL AT MY DOORSTEP.

Excerpts from the book on the web begin as follows: “It was a nasty, ugly, three-year, million-dollar war I did not ask for, but had to win. Otherwise, the business I loved would be infiltrated by a scheming labor union determined to undermine employee privacy rights and destroy my version of the American Dream.” Bego also pursued his dream by campaigning aggressively against the Employee Free Choice Act.

Attacks on corporate campaigns have surfaced before in Congress from time to time. These go nowhere, because any restrictions would inevitably violate the First Amendment and the National Labor Relations Act. The real counter-offensive comes in the courts, where large companies such as Smithfield Foods, Wackenhut and Cintas have filed racketeering lawsuits to harass unions engaged in such campaigns.

Apart from the Boeing-NLRB controversy, which has little to do with corporate campaigns, it is curious that a new foray against this union tool would occur now. Unfortunately, there has not been an explosion of aggressive organizing drives, and union density in the private sector is dwindling.

But perhaps Rep. Roe is concerned about what may be coming next in his home state. Roe’s district is not far from Chattanooga, where Volkswagen recently opened a $1 billion auto assembly plant. The workers there currently have no union protection, but that could change. The United Auto Workers has announced a new effort to organize the foreign auto plants clustered in the southeast, and the union’s new president Bob King vows it will be much more vigorous than past initiatives.

The UAW has not indicated which producer will be targeted first, but VW is probably a leading candidate. The German company recently shook up the auto world by revealing that it will keep its labor costs in Chattanooga far below not only those of its Detroit rivals but also those of U.S. plants run by Japanese competitors such as Toyota and Honda. With wage and benefit offerings at rock-bottom level, VW workers might very well be receptive to what the UAW has to offer.

A successful union organizing drive in eastern Tennessee would be a nightmare for the likes of Phil Roe. Fortunately, there is probably little he can do to prevent that possibility.

Corporate Taxes and Corporate Power

In his 2009 utopian novel Only the Super-Rich Can Save Us, Ralph Nader conjures up a scenario in which a group of enlightened retired U.S. billionaires spark a populist uprising against excessive corporate power. One of the prime issues in the revolt is widespread tax dodging by big business, aided by the various forms of corporate welfare inserted in the tax code by compliant members of Congress.

Among the real-life characters in Nader’s fantasy is Bob McIntyre (misspelled as MacIntyre), head of Citizens for Tax Justice. For more than 30 years, CTJ has been shining a light on the inequities in the U.S. tax system. During the 1980s CTJ issued a series of reports that documented the disastrous consequences of the Reagan business tax cuts and paved the way for the Tax Reform Act of 1986. That law closed many of the loopholes and cracked down on tax shelters, reversing the precipitous decline in corporate tax payments—until George W. Bush came along.

Alas, Nader’s vision has not come to pass, though a funhouse-mirror version of it can be seen in the pseudo-populist Tea Party movement instigated by some very different billionaires, the rightwing Koch Brothers. Yet McIntyre and CTJ are still on the scene and re-fighting the battles of the 1980s. Now, as then, CTJ stands out for naming names—listing the specific large corporations that pay little or no federal income taxes.

CTJ has just released a preview of its new study of corporate tax avoidance that identifies a dozen major companies—including the likes of General Electric, DuPont and Wells Fargo—that together paid less than nothing in federal income taxes over the past three years. The dirty dozen had total U.S. pretax profits of $171 billion for the period but had a combined effective tax rate of negative 1.5 percent.

Had these companies paid the full 35 percent statutory corporate rate, CTJ notes, their combined tax bill would have been about $60 billion. Instead, they got $2.5 billion from Uncle Sam. The $62 billion difference exacerbated the country’s budget deficits and national debt.

It would be comforting to imagine that brazen corporate tax avoidance is leading us to a replay of the backlash of 1986, with changes to the tax code that force big business to pay something closer to its fair share of the costs of running a government that treats it so well.

Unfortunately, that now seems as unlikely as Nader’s rebellion of the billionaires—and the reason is not just the intransigence of Republicans. The Obama Administration has adopted the bizarre position that any revenue gains from the elimination of business tax subsidies should be used to fund new reductions in the statutory corporate tax rate, which virtually no large companies pay.

In other words, the debate over corporate tax reform within the Washington establishment is between the Obama Administration’s “revenue-neutral” approach and the desire of the Republicans to shrink corporate tax liability to a point at which it can be given the Grover Norquist drowning-in-the-bathtub treatment. Corporate taxes account for less than 9 percent of federal revenues, so we have already moved far in that direction.

CTJ, to its credit, is calling for a revenue-positive approach to corporate tax reform to help alleviate the country’s fiscal problems, as are other progressive groups such as the new US Uncut movement. But there are more fundamental reasons to make business pay more.

The windfall profits produced by tax dodging also serve to enhance the overall power of large corporations and make it easier for them to engage in anti-social behavior. It is telling that CTJ’s list of major tax avoiders includes several companies—including Boeing and Verizon—that are leading foes of unions and several others—including Exxon Mobil and American Electric Power—that are key environmental villains.

A fatter bottom line for such companies means they have more money to fight stricter regulation and consumer protection, more money to undermine labor organizing drives, more money for dubious mergers and acquisitions that reduce competition, more for lavish executive compensation packages, and of course, more for lobbying and public relations efforts to make sure that overall public policy continues to serve the needs of corporations above all else.

Restoring corporate tax payments to more appropriate levels will not by itself reform big business, but it would make it easier for the rest of us to accomplish that without waiting for a group of retired billionaires to come to the rescue.