Chain of Thought

Pallets Look Like Containers to the Taxman

Bob McIntyre thinks American companies are way overdue for tax reform—and not in a way many of them would like. He thinks many companies have been getting away with murder by finding creative ways out of paying federal taxes. As co-author of a study on this topic and director for the Center for Tax Justice, he cited 30 of the 280 companies studied that paid less than zero in taxes from 2008 through 2010. The most creative tax evader of all was Pepco Holdings, a utility serving the Washington, DC area, which made $229 million in profits last year and claimed $270 million in tax credits. That's a -118% tax rate. I think even I could afford that.

Apparently Pepco achieved much of its savings through accelerated depreciation, a tax rule that allows companies to write off the equipment they purchase faster than those purchases can wear out. Companies can then deduct from their taxable income the falling value of these investments.

That sounds pretty slick. But for every example of creative accounting on the corporate side, I bet I could find an equally creative example of wordplay on the taxman's side of the table. There was a good one from the world of material handling recently involving Procter & Gamble. Mind you, this is tax law at the state level, but the taxman's the taxman, no matter where he resides. It seems Pennsylvania has a sales tax exemption for wrapping supplies purchased or used by a seller of goods.

This exemption specifically excluded returnable containers. The law defines returnable containers as “items designed to deliver property to customers more than one time.” In arguing against this definition, Procter & Gamble threw a number of definitions and industry standards back at the Pennsylvania taxman, and cited 58 years of regulatory history, during which time the Pennsylvania Department of Revenue only described items as "containers" if they had volume, like barrels, boxes and bottles.

The Pennsylvania Commonwealth court agreed with Procter & Gamble that a pallet is not a container. If you stretch the definition, maybe it's part of a container, but it's actually more like a floor.

Corporate attorneys from Reed Smith say the court confirmed Procter & Gamble's assertion, and added that the Department could not choose to read the term “container” out of the statute—in which case any "returnable" wrapping supply would be taxable. Therefore, the attorneys recommend that “any taxpayers who have paid tax based on the Department's letter ruling should file refund claims.”

Too bad Pepco's not a Pennsylvania company. If they were they'd probably find a way to deliver their energy on pallets.

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