Ralph Lauren strikes tax break deal

Polo maker exploited loophole that Florida lawmakers won’t close

The multibillion-dollar clothing company that sells Ralph Lauren polo shirts and other luxury apparel sought a $1.3-million income tax refund from Florida by taking advantage of a loophole that the Republican-controlled Legislature has chosen to leave open.

Accountants for Ralph Lauren Corp. argued Florida cannot tax income the New York-based company has shifted out of the state by paying itself for the right to use its own brand name and other trademarks, according to litigation records obtained by the Orlando Sentinel. The company then struck a confidential settlement deal with the Florida Department of Revenue, an agency spokeswoman said Tuesday.

Ralph Lauren, which turned a $431-million profit last year on sales of more than $6.3 billion, is among a long line of multinational corporations that have used the trademark strategy to avoid millions of dollars in Florida corporate income taxes in recent years.

Companies can do it because Florida — unlike the majority of states — allows corporations to file separate tax returns for their various subsidiaries and because of a unique loophole in state law dealing with how royalty payments are taxed. The trademark strategy was one of many corporate taxavoidance tactics that the Sentinel examined last year in its series, “Big Profits, Tiny Taxes.”

Florida lawmakers, who are in the final days of their 2020 legislative session, have rejected proposals to close the loophole by forcing companies to file a single tax return covering their entire business. A bill filed in the state Senate to require companies use socalled “combined reporting” when paying their income taxes wasn’t even given a hearing this session, in part because of intense opposition from big-business lobbying groups like the Florida Chamber of Commerce.

Republican leaders in Tallahassee say they don’t want to raise taxes on businesses that employ lots of people. But they also are suddenly searching for extra money in case the burgeoning coronavirus pandemic pulls the economy into recession.

Senate President Bill Galvano, R-Bradenton, told reporters this week that he would like to set aside $200 million in reserves as a cushion against any potential economic fallout from the coronavirus. And Galvano suggested that lawmakers could find that money by reducing the size of raises that have been proposed for public school teachers.

“I think we really have to think about what dollars we’re spending and on a recurring basis,” Galvano said. “We are looking to see if there is some way we could better prepare; maybe rethink some of these expenditures that are on their way down the pike.”

Economists don’t know for sure how much revenue the state could raise through combined reporting. But they have estimated in the past that it could generate nearly $500 million a year — primarily from multistate and multinational businesses like Ralph Lauren.

“We’re literally letting the biggest companies in the world keep their money outside of Florida when we know they do business here and they should pay tax on it,” said state Sen. Jose Javier Rodriguez, D-Miami, who is sponsoring the combined reporting bill. “If we’re looking at having healthy reserves as a state for whatever issue — whether it’s Covid-19 or economic issues — then this makes sense.”

Here’s how the trademark strategy typically works in Florida: A big corporation transfers the rights to its name, logo, patents and other intellectual property into a holding company in Delaware. Then the corporation has its Florida operating company pay “royalties” to its Delaware company for the right to use those trademarks.

Those payments serve to shift profits out of the Florida operating company and into the Delaware holding company. The Florida company can then report lower taxable income in Florida while the Delaware company can argue that it doesn’t owe any Florida tax at all.

That’s the playbook Ralph Lauren is using, according to the litigation records. The company has transferred all the trademarks for the Ralph Lauren brand into a Delaware subsidiary called PRL Fashions Inc., which charges royalties to other divisions within the company.

Representatives for Ralph Lauren did not respond to requests for comment Tuesday. But in a December 2018 letter to the Florida Department of Revenue, which was recently obtained by the Sentinel through a public records request, an accountant representing the company wrote PRL Fashions erroneously paid Florida income taxes on its royalty income between 2013 and 2015.

The company applied for a $1.3 million refund.

Ralph Lauren is by no means alone. In 2018, for instance, Whole Foods Markets, the grocery chain owned by Amazon.com, Inc., sued the state seeking a $1.4 million corporate income refund based on the same trademark strategy.

Separate records show that software giant Microsoft, macaroni and cheesemaker Kraft, electronics retailer Best Buy, cigarette manufacturer R.J. Reynolds, convenience store chain Circle K, and homefurnishings rental company Aaron’s have all used the trademark strategy to avoid millions in Florida taxes.

The Department of Revenue contends that companies still owe state taxes even when they shift profits out of the state through trademark payments. But the agency lost the only lawsuit over the issue that made it to a judge’s decision, and records show it frequently settles these kinds of cases for less than 20 cents on the dollar.

Corporate tax-reform advocates say the trademark strategy can be stopped with combined reporting, which wipes out any benefit of moving money from one subsidiary to another.

“We’re literally letting the biggest companies in the world keep their money outside of Florida when we know they do business here and they should pay tax on it.”

State Sen. Jose Javier Rodriguez, D-Miami, sponsor of the combined reporting bill