Delaware Loophole: The Significance Of 1209 North Orange Street

What do Donald Trump, Hillary Clinton and some 285,000 firms (including Apple) have in common?

They share the same address, 1209 North Orange Street, Wilmington DE.

This is extremely significant due to the fact that this two-story building has helped hundreds of thousands of companies, and individuals, evade hundreds of millions in taxes because of something called the “Delaware Loophole.” Multiple journalists from every media outlet you can imagine has visited the location, but the result has always been the same. The secretary at the door will just flat out say “You know I can’t speak to you.”

Now, the Panama Papers are bad enough, but a tax haven in the United States seems a bit crazy, right? In fact, it’s the largest of such addresses in the world and deals with some 15 times more clients than the 18,000 registered in the Cayman Islands’ Ugland House. President Obama called the Ugland House “either the biggest building in the world, or the biggest tax scam on record.”

So what does that make the Corporation Trust Center (CTC) located at 1209 North Orange Street?

The Ugland house is five stories and the CTC is only two, yet it’s the official home of Google, Coca Cola, Apple, Verizon and Deutsche Bank. The Delaware location allows companies to legally shift their earning from other states to Delaware. Why would anyone want to do that, you ask?

Simple.

Because in Delaware, you’re not taxed on non-physical incomes generated from outside the state. This little loophole has cost other states over $9 billion in lost taxes over the last 10 years and this isn’t even the first time we’ve heard of the CTC. What’s more, this isn’t just about the CTC, this is about Delaware as a whole. The state was founded on business when the Court of Chancery was opened in 1792. Fast forward to the early 20th century and the state began writing corporate and tax laws that were favorable to businesses and would lure companies from New York, New Jersey and other states.

Back in 2011, nearly half of all public corporations in the United States were incorporate din Delaware and they even had more private and public corporate entities than people. Go back a few more years and you’ll find that the United States was ranked No. 1 on the Tax Justice Network’s Financial Secrecy Index and it cited Delaware as one of the reasons. The United States now ranks No. 3 behind Switzerland and Hong Kong.

So, why is this still allowed? Shouldn’t it be illegal for shell companies to be set up in under an hour (seriously, that’s how long it takes in DE) so that millions in taxes can be evaded?

It should be, but technically it’s not. The tax code contains a glaring loophole, as aforementioned, that collects zero tax on income relating to intangible assets held by a “Delaware Holding Company,” or a “Passive Investment Company (PIC).” This includes interest, investment income and even income related to intellectual property (trademarks, patents etc.). This income goes untaxed in the parent state and companies then use it as a deductible business expense.

This could be changed, though. All it takes is for Delaware lawmakers to pass legislation eliminating loopholes and similar laws that allow for such activity to transpire. That said, why would they want to do that? This is an easy way for everyone involved to save millions and the Delaware legislature have made minimal effort over the past decade to do anything about it.

Offshore tax havens are a massive problem, and it’s nice that the Panama Papers exposed so many… but it’s hard to point the finger when there’s a tax haven right in our backyard. I’s even harder to justify having one so close to the White House when a presidential candidate who uses a domestic tax haven says this:

“Some of you may have just heard about these disclosures about outrageous tax havens and loopholes and superrich people across the world are exploiting in Panama and elsewhere,” Hillary Clinton told the Pennsylvania AFL-CIO annual Constitutional Convention. “We are going after all these scams and make sure everyone pays their fair share here in America.”

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