RALEIGH — A North Carolina appeals court defended the power of tax collectors to recalculate the returns of multi-state companies that shift assets to avoid or diminish corporate income bills.
A unanimous three-judge panel of the N.C. Court of Appeals on Tuesday ruled that Delhaize America Inc., parent company of the Food Lion grocery store chain, owes North Carolina $10 million in back taxes and penalties.
The court also reversed a lower court and said the state’s Revenue Department could assess Delhaizie a penalty of nearly $1.1 million because its improper deductions understated its tax obligations by nearly 90 percent.
Food Lion expanded from its North Carolina home base into Florida in the 1990s by buying Kash n’ Karry Food Stores Inc. It set up Florida subsidiaries to manage the stores in that state. Outside accountants recommended Food Lion transfer assets to a subsidiary in lower-tax Florida, creating a tax deduction in North Carolina. The Florida company would return cash to Food Lion in the form of tax-free dividends, the court said.
“The cash flow between the entities was circular,” Judge Cressie Thigpen wrote for the court.
The appeals court rejected arguments by Delhaizie’s lawyers that the state Revenue Department’s criteria for combining multi-state tax returns was “deliberately concealed,” and tax collectors “operated in an ad hoc manner without ascertainable standards.”
The appeals court said North Carolina tax collectors since 1964 have issued guidance to corporations on how it approaches its authority to combine the finances of multiple corporate subsidiaries to prevent big companies from moving income to out-of-state units to avoid state taxes.
Delhaize America and Food Lion said in a statement that the grocer was reviewing the court’s ruling and considering its options.
The Revenue Department’s strength to combine and recalculate corporate tax bills was bolstered in 2009 when Wal-Mart Stores Inc. lost a court fight over the company’s efforts to get a $33 million tax refund. The ruling led to 236 corporations that had previously disputed their tax bills paying back taxes totaling $424 million that year.
But last year, Republicans leading the state Legislature for the first time in over a century restrained the ability of North Carolina tax collectors to pursue revenues from multi-state corporations.
The Revenue Department said it could cost about $32 million dollars a year in lost tax collections. Republicans defended the effort, saying it gives corporations more predictability in tax planning and makes the state more appealing to companies.
The changes require the Revenue Department to do more digging to prove that deals between subsidiaries lacked business substance or transferred assets at below market prices, said Canaan Huie, the tax agency’s general counsel. If those warning signs are spotted by auditors, the Revenue Department first must adjust the values or amounts of payments on a company’s tax return before taking the step of combining corporate books for tax purposes, he said.
“It would be less likely that we could force a combination today,” Huie said.