An eight-year court battle between the NC Department of Revenue and Food Lion’s parent company, Delhaize America, has come to a close, affirming the state’s right to require large multistate corporations to report and pay taxes on business income earned here in North Carolina. In a unanimous ruling, the State Court of Appeals ruled in favor of the Department of Revenue in Delhaize America, Inc. v. Hoyle, awarding the state nearly $10 million in back taxes, including the restoration of a $1.2 million penalty for negligence. The Triangle Business Journal provides an excellent summary of the ruling, which reverses in part a ruling by a North Carolina business court earlier this year.
That earlier ruling said, “[t]his case demonstrates what happens when creative accounting meets creative revenue enforcement,” but “creative” is a gentle word to describe the accounting strategy that Food Lion/Delhaize adopted, in which they shifted hundreds of millions in business income from North Carolina to a holding company in Florida to reduce their state corporate tax liability. In the year 2000, it reported $312,735,091 in net taxable North Carolina income, and then deducted $273,982,913 in dividends paid to its Florida holding company. For that year, Delhaize paid $2,824,609 in state corporate income tax – less than 1% of its total taxable North Carolina income. (It’s worth mentioning here that the state’s corporate tax rate has been 6.9% since 2000, which is roughly 7 times greater than what Delhaize actually paid that year.) It’s also worth noting that Delhaize currently owns 1,127 grocery stores in the United States, 507 of which are in North Carolina, making it somewhat hard to believe that 88% of its business income was magically generated elsewhere.
In 2004, the revenue department objected to this income-shifting strategy, ruling that operations for Delhaize and its Florida subsidiary should be combined for tax purposes – a decision that resulted in Delhaize owing the state an additional $6.9 million in total taxes and fees, which included a $1.2 million penalty for negligence. In 2008, Delhaize filed the initial lawsuit in response to the Department of Revenue’s “forced combination, ” and the fight was on.
Without delving too deep into the details of the ruling, Delhaize now owes the State of North Carolina $20.6 million in total back taxes and penalties, part of which they have already paid. While the use of subsidiary companies in low-tax locations as a state tax avoidance strategy is not unique to Delhaize, this ruling reinforces the right of the state to require that companies report and pay tax on the business income they earn from economic activity within the tax jurisdiction. These are revenues that go to fund public schools, health care, roads, courts, and other public structures on which companies – like Delhaize – rely.