Legislation to slightly increase franchise taxes for corporations, a small tax on each licensed corporation doing business in the territory, was amended to limit its impact on capital investments, then sent out of the Rules and Judiciary Committee Thursday for a final vote.
“These concerns go back as far as 2002, which is the last time this statute has been amended,” Sen. Novelle Francis (D-STX) said, introducing the bill to the Rules and Judiciary Committee. “It would allow the government to collect what is owed to the V.I. Treasury and would not affect the average mom and pop stores which are the lifeblood of the economy of the territory,” he said.
Under the proposal, the franchise tax for V.I. corporations would increase from a minimum of $150 to a minimum of $300 and for outside companies doing business in the territory from $300 to $500. The bill initially defined “paid in capital” for the purpose of computing this tax. The tax would have been the greater of either the minimum tax, or $1.50 for each $1,000 in “capital stock” used by the company. But that provision was changed.
The change in the law was prompted because “capital stock” is undefined. A 2001 court case applied a definition that reduced its meaning to a nearly insignificant proportion of actual stock in a company, Denise Johannes, director of the Division of Corporation and Trademarks in the Office of the Lieutenant Governor, testified when the bill was first heard in committee.
The case; Miller Properties versus the Government of the Virgin Islands in 2001, upheld on appeal in 2003, reduced franchise tax payments.
“Miller Properties sued the Virgin Islands government to clarify that the words ‘capital stock’ was equivalent to “capital,” which limited the calculation of franchise tax to the value of issued and outstanding shares as set forth in the articles of incorporation. Any surplus payments to a corporation in excess of the par value of stock, which is generally referred to as paid-in capital, was not taxable as capital or capital stock. Furthermore, although the price paid for later issued stock generally exceeds the par value set forth in the articles of incorporation, under the current version of the statute this additional amount is not taxable as ‘capital stock,’” Johannes said.
“Given that the standard issuance at the time of formation is often only nominally stated as 1,000 shares at $1 each, what this means is that oftentimes large, well-capitalized Virgin Islands corporations only pay $150 in franchise taxes annually,” she said.
The bills new definition of “paid-in capital” would include the cash and other consideration received, minus expenses, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, and the amount of capital paid in that is in excess of the stated par value of any class of stock.
The more expansive definition was meant to ensure that larger companies with more resources will pay a higher tax than before. But members of the business community argued it would severely penalize companies for investing in the territory and would severely tax companies that own capital, from land to insurance reserves, regardless of whether they were actually making large profits.
George Dudley, a St. Thomas attorney and co-chairman of Lockhart Companies, parent of a large real estate and a large insurance company on St. Thomas, argued the definition of capital would be a huge burden to capital intensive companies, and that being large is different from being highly profitable.
He gave two examples of cases where the tax would be burdensome: One was Margaritaville Vacation Club by Wyndham, the new timeshare resort on St. Thomas. He said parent company Wyndham Worldwide Corporation committed to the V.I. Government to invest more than $110 million dollars to develop the resort under the Virgin Islands Economic Development program. It receives broad tax breaks through that program. With the bill’s original definition of “paid-in capital” Margaritaville would be required to pay a franchise tax of $150,000 each year on that investment, while it’s multi-billion dollar parent company, Wyndham Worldwide Corporation, pays $180,000 – only slightly more – in annual franchise taxes to Delaware.
“Wyndham has kept its commitment, invested more than $100 million, and now is being thanked for that investment by the imposition of a new tax of $150,000 per year. A tax it would be required to pay whether or not the corporation realizes any profit on its investment. And a tax it would not be required to pay anywhere else in the Caribbean,” Dudley said.
His second example was Lockhart Companies Incorporated – his own company.
“For Lockhart this revised definition of ‘paid-in capital’ amounts to a second tax on the real estate and other assets held by the company in the Virgin Islands,” he said.
“Lockhart Realty currently is one of the largest real property taxpayers in the Virgin Islands, paying more than $350,000 in property taxes every year. Under the new definition of ‘paid-in capital,’ in addition to real property taxes, Lockhart would have to pay an additional $150,000 each year in franchise taxes. What is the incentive for the owners of Lockhart to continue to invest in the Virgin Islands when for every $1,000 invested in a new venture or reinvested to expand an existing company Lockhart would be subject to a tax of $1.50 per $1,000 of additional investment every year?” he asked.
He said he was not opposed to an increase in the franchise tax but objected only to the redefinition of the term “paid-in capital” to make it a de facto tax on the assets and invested capital of a corporation.
“At a minimum, I urge the removal of the phase “plus any cash or other consideration contributed to the corporation by or on behalf of its shareholders” from the proposed definition of ‘paid-in capital'” he said.
Johannes and Dolace McLean, legal counsel for the Office of the Lieutenant Governor, agreed to removing the language Dudley highlighted, and clarifying that the change only affected future financial investments, not past ones.
The committee approved an amendment from Francis to make those changes. Voting for the bill as amended were: Francis, Sens. Marvin Blyden (D-STT), Jean Forde (D-STT) and Sammuel Sanes (D-STX). There was no opposition. Absent were Sens. Myron Jackson (D-STT), Janette Millin Young (D-STT) and Positive Nelson (ICM-STX).