Staples owes state more than $14 million in taxes, court rules

The office-supply retailer Staples owes Maryland more than $14 million in unpaid taxes from between 1999 and 2004, an administrative court has ruled.

The Massachusetts-based company reorganized its business in 1998, creating two entities: Staples Inc., which handles administrative functions such as accounting and human resources; and Staples the Office Superstore Inc., which oversees franchise operations, including inventory and marketing.

Both entities are Delaware corporations with subsidiaries that operate the more than 40 stores in Maryland.

The state comptroller’s office alleged the entities were set up in part to avoid income taxes in Maryland. The Court of Appeals last year held the comptroller can tax income of out-of-state-subsidiaries of a company doing business in Maryland if the subsidiaries are dependent on the parent company.

Staples argued its entities paid more than $150 million in salaries to thousands of workers and owned $260 million in real property and other depreciable assets over the course of the five-year period.

But the Maryland Tax Court, in a ruling last week, cited the Court of Appeals opinion in finding Staples’ separate entities could not operate independently, meaning they created a unitary business under Maryland law that is subject to state taxes.

“The Court concludes that the Comptroller’s assessments reasonably reflected how the Petitioners’ income was generated and fairly represented income attributable to Maryland,” the court ruled.

A spokeswoman for the comptroller’s office said the agency was pleased with the tax court ruling but declined further comment. Comptroller Peter Franchot has targeted companies trying to avoid taxes by establishing holding companies, and his office has recovered more than $110 million from such companies.

But Alexandra P.E. Sampson, a member of the Maryland Chamber of Commerce’s Taxation Committee and the Maryland State Bar Association’s Tax Study Group, said Staples doesn’t fit the bill.

“Clearly, this entity is not a sham entity,” she said. “This entity is providing valuable services.”

The Staples ruling is the second time the tax court has ruled in favor of the comptroller’s office since last year’s Court of Appeals decision. In February, the administrative court ruled ConAgra Brands Inc. owed more than $3 million in unpaid taxes.

Sampson, an associate at Reed Smith LLP in Washington, D.C., who has followed both cases, said the rulings send the wrong message to out-of-state companies.

“If you set up your business in a way that makes it more efficient, we’re still going to come after you,” she said.

But Raymond J. Sherbill, who chairs the business and taxation group at Lerch, Early & Brewer Chtd. in Bethesda, said the tax court in the Staples case pointed to the company’s state tax assessments prior to 1998 as proof it was trying to reduce its taxes. Staples paid $1.4 million in 1997, up from $220,000 in 1993.

“The court… found its 1998 corporate reorganization to be a scheme to shift that underlying taxable income out of Maryland,” said Sherbill.

Sherbill added he expects to see more, similar actions taken by the comptroller’s office.

“In recent cases, they clearly have created a clear and broad definition of a unitary business that can be subject to apportionment and tax in Maryland,” he said.

The tax court also in its ruling waived any interest payments or penalties Staples might have owed the state, finding the company “had a reasonable basis for challenging the law and acted in good faith.”

A spokesman for Staples did not respond to a request for comment. The company can appeal the ruling; ConAgra’s appeal is pending in Anne Arundel County Circuit Court, according to online court records.