The Florida Legislature just let Target dodge $15 million in corporate taxes
The cost of Florida's failure to close corporate tax loopholes.
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To its customers, employees and investors, Target is one big company.
The big-box retailer is an enormously successful company, too: Target turned a profit of nearly $7 billion last year.
But when it comes time to pay Florida taxes on that profit, Target Corporation pretends to be a collection of smaller companies.
By splitting itself into separate pieces, Target has avoided at least $15 million in Florida corporate taxes since 2013.
That’s according to records from a lawsuit Target just won against the Florida Department of Revenue, which had accused the Minneapolis-based company of illegally dodging taxes. A Tallahassee judge appointed by former Gov. Rick Scott ruled in the company’s favor last week.
Target was able to avoid these taxes by taking advantage of an old and outdated part of Florida’s corporate tax code that lets giant corporations pay taxes as if their wholly owned subsidiaries were separate and independent businesses.
The system is known as “separate reporting” — and it makes it very easy for global corporations doing business in Florida to hide their money from taxes by moving it through an internal maze.
Target is just one example of many. Records show that scores of corporations — Amazon, Chevron, Microsoft and more — exploit Florida’s system of separate reporting. Altogether, experts estimate that corporations collectively skip out on nearly $500 million a year in Florida corporate taxes thanks to separate reporting.
That’s the same amount of money the state of Florida spends on its entire statewide pre-kindergarten program.
Here’s the good news: There’s an easy way to stop this. All Florida has to do is pass a policy known as “combined reporting.”
Combined reporting would require a large company like Target to combine the profits of all its subsidiaries and report them on a single, unified tax return — just like the single, unified company that Target actually is. That would make it far harder to avoid Florida taxes simply by passing profits from one hand to the other.
But here’s the bad news: Florida’s Republican-controlled Legislature has repeatedly refused to pass combined reporting over the years. Lawmakers have instead bowed to pressure from big-business lobbying groups like Associated Industries of Florida, which represents corporate taxpayers like Florida Power & Light, HCA Healthcare and Disney — and which showers Florida politicians with millions of dollars in campaign contributions every year.
Just this year, the Florida House of Representatives voted 75-39 against combined reporting, shortly after the Florida Chamber of Commerce threatened to punish any legislator who supported it.
This battle is far from over, though. More states are switching to combined reporting. More than half the country now requires it, even Republican strongholds like Texas, Utah and Kentucky.
It’s becoming a bipartisan idea in Florida, too. U.S. Rep. Matt Gaetz, the brash Panhandle Republican best known as one of Donald Trump’s most loyal supporters, recently came out in support of combined reporting.
Even Gov. Ron DeSantis told a conservative audience earlier this year that conservatives should rethink their support for corporate tax breaks, though the Florida governor has yet to put those words into policy.
This fight will happen again, and it’ll happen again soon. So let’s unpack combined reporting more right now — using details from Target’s lawsuit to illustrate how this stuff works.
How it’s supposed to work
Let’s start with something fundamental about Florida’s tax on corporate profits:
Florida can only tax profit that a company actually earns in Florida. Florida can’t tax profit that Target makes in Minnesota or California or Texas. (And those states can’t tax the profit Target makes here, either.)
This means that Florida needs to answer two big questions before it can tax Target’s profit: How much did Target make in total profit? And how much of that profit did Target make here in Florida?
The first question is relatively easy to answer. Target pays federal corporate taxes, too. So Florida looks to Target’s federal tax return to find out how much the company made in total profit.
But the second question is a bit more complicated. To figure out how much of Target’s profit was earned in Florida specifically, the state uses a formula that weighs several factors. The most important of those factors is how much Target sells in Florida compared to the rest of the country.
Deciding where a sale happens is relatively straightforward when a company is selling physical merchandise. If someone buys a blender at a store in Miami, then that sale clearly took place in Florida.
But things can get trickier when a company sells a service. If someone in Tampa pays an accountant in Atlanta to do their taxes, did that sale happen in Florida or Georgia?
Florida has a few rules that companies are supposed to follow when deciding whether the services they sell are sold in Florida or another state. The most important one is known as the “cost of performance” rule.
But Florida’s cost of performance rule was written decades ago, and it no longer works like it was originally intended. In fact, it’s evolved into a major loophole that companies like Mastercard and eBay use to claim that they aren’t selling anything in Florida.
This is such a problem that most states have long since abandoned similar “cost of performance” rules in favor of a more modern rule that is harder for corporations to game. But Florida’s cost of performance rule is still on the books.
Now, this shouldn’t matter in the case of a company like Target. Target, after all, makes almost all its money selling physical merchandise like clothes, home goods and groceries.
But this is where separate reporting comes into play.
How it really works
Target Corp. operates more than 1,900 stores across the country, including 127 in Florida.
There’s a lot that goes into running a nationwide retail empire like that. For instance, Target must develop real-estate; procure merchandise; design in-store layouts and product displays; and advertise to shoppers.
Target has set up a subsidiary to provide all those specialty services to its stores. It’s called Target Enterprise Inc. And Target Corp. pays Target Enterprise Inc. billions of dollars.
If you’re a Target customer or investor, this is all meaningless. It’s just one division moving money to another behind the scenes.
But it’s very important for Florida taxes. That’s because Target Corp. and Target Enterprise Inc. pay taxes as if they were separate companies.
This allows Target Corp., which makes its money selling physical merchandise to consumers, to lower its Florida tax bill by deducting all the payments it makes to Target Enterprise Inc.
And it allows Target Enterprise Inc., which makes its money selling services to Target Corp., to lower its tax bill by exploiting that “cost of performance” loophole.
Again, auditors at the Florida Department of Revenue tried to put a stop to this. They said Target was using Target Enterprise Inc. as means of “intercompany shifting of income” that distorted Target’s true Florida profit. But Leon County Circuit Judge J. Lee Marsh — a former lawyer under ex-Florida Attorney General Pam Bondi who was made a judge by former Gov. Rick Scott — ruled on Nov. 28 that Target was operating within the law.
That specific case covered $7.9 million in taxes over a three-year period from 2016 to 2018. But Target is also contesting a nearly identical assessment for $8.4 million in taxes between 2013 and 2015, and that’s likely to be resolved by this ruling, too.
Helping small business instead
This would be much harder for Target to pull off if it wasn’t allowed to pretend like Target Enterprise Inc. was some separate and independent company.
It’s also just one example of the ways corporations use separate reporting to manipulate Florida’s tax laws to their advantage. There are many, many others.
And it’s exactly what supporters of combined reporting are talking about when they say they want to close corporate tax loopholes.
The Florida Legislature is going back into session soon. Committee hearings could begin later this month. The formal 2023 session will gavel open on March 7.
It’s a sure bet that combined reporting will come up again. Some lawmaker will file it as a bill — the sponsor might even be a Republican. Or they’ll force a vote on the issue by trying to amend combined reporting onto another piece of tax legislation.
Whenever that happens, a bunch of corporate lobbyists will claim, yet again, that combined reporting is “anti-business.”
But here’s one more thing to know about combined reporting: It’s actually very good for small, Florida-based businesses — the kind of businesses that can’t bounce billions of dollars between subsidiaries and that end up shouldering more of the tax burden in Florida because global corporations are skipping out.
Consider this: A few years ago, the state of Rhode Island switched from separate reporting to combined reporting.
Combined reporting increased the state’s corporate-tax collections by roughly 40 percent.
But 98 percent of those extra taxes — 98 cents of every dollar — was paid by out-of-state corporations.
