Anheuser-Busch InBev SA made nearly $2 billion on that sale — and then said Florida couldn’t tax any of it, cutting its state corporate income tax bill by more than $5 million, according to litigation records.
To get those tax savings, Anheuser-Busch used a vague section of the tax code that’s supposed to deal with profits companies earn outside of their normal course of business.
Big Profits, Tiny Taxes:
The Bud Light brewer is not alone. Businesses from department store retailer J.C. Penney to hospital operator HCA have seized on the same imprecise part of the law to shield big chunks of income from Florida income taxes, according to litigation records.“Nobody knows exactly what the standard is, so it’s a gray area,” said Jim Ervin, a tax attorney in the Tallahassee office of Holland & Knight.
Economists estimate that Florida loses nearly $50 million a year to companies claiming these kinds of deductions for irregular profits. That’s more than the state is spending this year to preserve environmentally sensitive land through the “Florida Forever” land-buying program.
Businesses making nonbusiness money
As confusing as it sounds, sometimes a business makes “nonbusiness income.”
It happens when a company earns money outside of its usual business. For instance, if a railroad has extra cash that it decides to invest, any money it makes off those investments would likely be considered nonbusiness income.
Generally, when a big company does business in many states, each state taxes a portion of that company’s profits. Except for nonbusiness income.
The only state that can tax a company’s nonbusiness income is usually the state where the company is based -- although tax experts say companies will sometimes try to maneuver their nonbusiness profits to a low-tax state where they may only be nominally headquartered, like Delaware.
Experts say companies most often try to claim nonbusiness deductions after selling off a major asset, like one of their subsidiaries, a factory, or a stake in another company. Those kinds of sales generate enormous capital gains -- and they give companies lots of incentive to take states to court if they think there’s a chance they can whittle down the subsequent tax bill.
“As far as resources go, everyone kind of has to be efficient,” said Jeff Reed, an attorney who chairs the state and local tax practice at Kilpatrick Townsend & Stockton in New York. “If you’re a state, you don’t want to spend a lot of money chasing small amounts. And if you’re a company, it’s probably not worth appealing over a small-dollar thing. But with these types of tax disputes, the tax dollars at stake are high."
Selling a Beer Business
Anheuser-Busch’s tax battle with Florida was exactly that kind of case.The dispute involved a web of joint ventures between various alcohol companies ultimately centered on a business called “Crown Imports,” which owned the American distribution rights to beers made by the Mexican brewer Grupo Modelo, whose brands included Corona, Negro Modelo and Pacifico.
Grupo Modelo owned 50 percent of Crown Imports. Anheuser-Busch in turn owned 50 percent of Grupo Modelo.
In 2013, Anheuser-Busch completed a deal to buy the other half of Grupo Modelo. But to win antitrust approval from the U.S. Department of Justice -- which was worried about Anheuser-Busch gaining too much control over the American beer market -- Anheuser-Busch had to sell off Grupo Modelo’s half of Crown Imports.
Anheuser-Busch made $1.85 billion on that sale, the company said at the time.
One reason Crown Imports was so valuable was that it included the distribution rights in Florida, the third-largest state in the nation. Grupo Modelo had been earning profits in Florida through Crown Imports -- and paying state income taxes on those profits -- up until that point, according to litigation records.
But Anheuser-Busch argued that the sale of 50 percent of Crown Imports -- a sale forced by the federal government -- was not a part of its normal course of business and therefore the $1.85 billion was nonbusiness income.
The company then subtracted those profits on its 2013 Florida tax return, saving itself $5.1 million in state taxes, the litigation records show.
The Florida Department of Revenue accused Anheuser-Busch of mischaracterizing that money. The agency said the company had sold off an asset that was part of its central beer business, so the money from that sale was normal business income. But when the revenue department attempted to collect, Anheuser-Busch protested. The two sides agreed to a settlement.
The terms of that settlement are confidential. But litigation records show Anheuser-Busch had offered to pay just $500,000 -- less than one-tenth of what the state said it owed.
Representatives for Anheuser-Busch InBev did not respond to requests for comment.
Isolating Big Gains
There are lots of similar examples.In 2010, for instance, the company that makes Dr. Pepper struck major licensing deals with The Coca-Cola Co. and PepsiCo Inc. to have those companies bottle and distribute some of Dr. Pepper’s drinks. The deals netted Dr. Pepper more than $1.5 billion combined, according to litigation records.
Dr. Pepper, which was based in Texas at the time, initially paid Florida tax on a portion of those profits. But it later decided that the money should have been classified as nonbusiness income because, the company argued, it does not normally strike big licensing deals. The company filed for a state tax refund of about $4.5 million.
The department of revenue initially denied the refund request. But Dr. Pepper pushed back and negotiated a settlement.
“We can confirm a refund was paid,” said Katie Gilroy, a spokeswoman for the company, which is now known as Keurig Dr. Pepper Inc. and is based in Massachusetts. She did not say how much of the $4.5 million tax payment was refunded.
Three years later, in 2013, J.C. Penney Company Inc. made $31 million selling off stock it owned in the mall operator Simon Property Group Inc.
According to a report in the Dallas Morning News, Texas-based J.C. Penney had built up its stake in Indiana-based Simon over time through the normal course of its business -- when it would open a store in a Simon-owned mall, Simon would give J.C. Penney what were essentially ownership stakes in the properties. J.C. Penney has more than 50 stores in Florida, including 10 in Simon-owned malls, according to the companies’ regulatory filings.
But when J.C. Penney sold its Simon shares, the retailer deducted the gain as nonbusiness income because, it said, it does not normally sell off stock in other companies. The move saved J.C. Penney about $1.5 million on its 2013 Florida tax bill, according to litigation records.
The revenue department denied the deduction and assessed J.C. Penney for back taxes. But J.C. Penney sued; the two sides are currently litigating in a Tallahassee court. A spokeswoman for J.C. Penney said the company does not comment on pending litigation.
And in 2014, Virginia-based Graham Holdings Co., the parent company of test-prep business Kaplan, said Florida couldn’t tax any portion of the nearly $397 million it made selling its stake in Cars.com to USA Today publisher Gannett Company Inc.
Graham, which used to own The Washington Post before selling it to Amazon.com Inc. founder Jeff Bezos, classified its profits from the Cars.com sale as nonbusiness income even though, according to litigation records, Cars.com made money in Florida and Graham had previously included its share of Cars.com’s earnings in its Florida income tax returns. The move appears to have cut Graham’s 2014 Florida tax bill by at least $1.5 million, according to the litigation records.
After an audit, Florida denied the deduction and Graham is now suing. A spokeswoman for Graham said the company does not comment on pending litigation.
(Three other media companies also sold their interests in Cars.com to Gannett: Tribune Media, which is now owned by Nexstar Media Group Inc. and made $686 million on the deal; The McClatchy Co., which made $632 million; and A.H. Belo Corp., which made $78 million. Representatives for Nexstar and McClatchy would not say whether those companies classified their proceeds from the sale as nonbusiness income. Representatives for A.H. Belo did not respond to requests for comment.)
It’s not clear what any of these companies paid in total Florida corporate income tax because the amounts aren’t disclosed in the litigation files -- and the Florida Legislature doesn’t make companies publicly reveal their state tax payments.
Creating A New Deduction
HCA Healthcare Inc., the Tennessee-based, for-profit hospital company with 45 hospitals and 32 surgery centers in Florida, found a way to create nonbusiness income.The strategy centered on an internal insurance company that HCA set up. According to litigation records, the company had its hospitals, surgery centers and doctors buy medical-malpractice coverage from that subsidiary.
Insurance companies make money by taking the premiums they collect from policyholders and investing them, generating investment returns. HCA’s insurance company did the same thing, by investing the money it collected from HCA’s other businesses.
When HCA’s insurance company earned income from those investments, HCA labeled it nonbusiness income on its state tax returns. According to a summary written by a Florida auditor, HCA claimed that, because it was a health-care company, investing money was not a part of its normal course of business -- even though investing money is a normal part of an insurance company’s business.
In just one year -- 2006 -- litigation records suggest that HCA used the move to shield $150 million of income from Florida taxes. That reduced the company’s tax bill that year by nearly $2 million.
The insurance strategy was a part of a sprawling tax dispute between HCA and the Florida Department of Revenue that covered more a half-dozen tax-avoidance techniques and more than a decade’s worth of cases.
That suit, which covered HCA tax bills from 2001 to 2012, was settled in 2016. Records show the state let HCA keep $28 million worth of taxes it initially said the company owed, while HCA dropped $32 million worth of refund requests.
But the company and the state are now fighting again over many of the same issues -- including HCA’s nonbusiness income deductions. HCA this fall sued the revenue department after the agency audited the company again and assessed it for more than $6 million in back taxes between 2014 and 2016. HCA has countered with more than $17 million of refund requests.
HCA, which earns nearly a quarter of its revenue in Florida, is one of the state’s largest single corporate income taxpayers. An HCA spokesman said the company paid more than $59 million in Florida income taxes in 2018 -- which implies that HCA earned more than $1 billion of taxable profit in Florida that year.
“We believe that we have properly reported taxable income and paid income taxes in accordance with Florida law,” HCA spokesman Harlow Sumerford said. “When disputes have arisen, we have worked with the Department of Revenue to resolve them.”
Enforcing The Law
Staffers at the Florida Department of Revenue have suggested changes over the years that could tighten the state’s nonbusiness income law. The Florida Legislature has declined to adopt them.But even without those changes, tax attorneys say Florida’s current law -- which was passed in 1984 -- is one of the stronger nonbusiness income laws in the country. “The Florida test is pretty tough,” said Reed of Kilpatrick Townsend & Stockton. “If you’re the company, it’s maybe a little uphill to argue nonbusiness income.”
To enforce that law, though, auditors must unearth potential abuses. And Florida’s audit staff has shriveled in recent years.
Twenty-five years ago, records show the revenue department had nearly 800 auditors. Today, the agency has fewer than 550. That’s a 30 percent drop.
The agency conducted 707 corporate income tax audits during its last fiscal year. That was down 31 percent from six years ago -- the last year for which the agency said it had comparable records -- when the department did 1,026 corporate income tax audits.
“You can have the most water-tight laws, but if you don’t devote adequate resources to enforcing them, it doesn’t do you much good,” said Michael Mazerov, a senior fellow at the Washington-based Center on Budget and Policy Priorities, which advocates for higher corporate income taxes.
If taxpayers think they are less likely to be audited, they become less likely to voluntary comply with tax laws. Even minor changes in compliance can have major impacts: The revenue department has estimated that a drop in the voluntary compliance rate of just one-half of one percent costs Florida $200 million in lost revenue.
A spokeswoman for the Department of Revenue -- whose director is appointed jointly by Florida’s governor, attorney general, chief financial officer and agriculture commissioner -- said a variety of factors have influenced the size of the state’s audit staff, including advances in technology and streamlined processes.
“The department utilizes all the administrative tools available to enforce the current law,” said agency spokeswoman Valerie Wickboldt.
But Glenn Bedonie, an accountant in Tallahassee who worked for the Department of Revenue from 1980 until 2004, said Florida did far more in the 1980s and 1990s to police tax-avoidance.
“We were aggressive. They basically balanced the budget by audit recoveries,” Bedonie said. “But the appetite for that type of enforcement is no longer there.”
©2019 The Orlando Sentinel (Orlando, Fla.). Distributed by Tribune Content Agency, LLC.
