Recognized across much of the country by its bright-red logo, Circle K has hundreds of convenience stores in Florida, selling everything from coffee and engine oil to ice cream and potato chips.
But for at least a decade, when Circle K's cash registers rang in Florida, a portion of the sales was passed on to a company subsidiary in Delaware -- beyond the reach of Florida's corporate-income tax.
Circle K was paying "royalties" to itself, with the company's Florida business paying its Delaware one for the right to use the corporate logo on store signs, plastic mugs and paper napkins. The arrangement allowed Circle K Stores Inc. to shield $56 million in profits from Florida's income tax during a three-year period -- and saved the company as much as $3 million in taxes.
Circle K, a unit of the French-Canadian conglomerate
, is one of at least 100 companies -- and potentially more -- that have used similar intracompany payments to siphon profits out of Florida in recent years, according to records obtained by the Orlando Sentinel. Others include cigarette maker
Hundreds of millions of dollars are at stake. Some corporations have avoided tens of millions of dollars apiece in Florida income taxes, the records show, dwarfing Circle K's savings.
It all appears legal -- thanks to an apparent "loophole" in Florida's corporate-income-tax law that was exposed during a little-noticed lawsuit between Circle K and state tax authorities. And unless the
acts, the judge in that case has ruled, he and others are helpless to stop the practice.
"No, I don't think it's fair. ... I think these are business activities in the state of Florida," state Circuit Judge Charles A. Francis said during a December 2011 hearing in
that pitted Circle K against the Florida Department of Revenue. But "the loopholes are loopholes or whatever. And if they're there and the Legislature doesn't act to correct it, I think that's nothing I can do anything about."
Aggressive "tax planning" strategies such as the one used by Circle K have contributed to an erosion of the corporate-income tax, which generated just less than $2 billion for Florida last year. Although U.S. corporate profits rebounded to record levels in 2012, Florida's corporate-tax collections remained 20 percent below their pre-recession peak.
Florida's Republican-controlled Legislature has rejected previous attempts to clamp down on such tactics. But after a deep economic downturn that forced spending cuts for everything from universities to mental-health programs, attitudes in the Capitol could be changing.
"I'm a fiscal conservative, and I have no desire to milk more money out of companies. But I also believe in fairness in taxation," said state Rep. Ritch Workman, R-
, chairman of the House Finance & Tax Subcommittee. "I don't like the idea of a shell game being played to avoid taxes."
"That's clearly a loophole that needs to be fixed," said Sen.
Representatives for Circle K and parent company Alimentation Couche-Tard did not respond to repeated requests for comment.
To use the trademark strategy, a company transfers ownership of its logos, patents and other "intangible" property to a subsidiary incorporated in a tax-haven state such as Delaware or Nevada. It then has its other businesses pay royalties to that subsidiary for the right to use the trademarks.
In Florida, those operating businesses can then deduct the royalty payments from their taxable income, reducing what they pay Florida under the state's 5.5 percent corporate-income tax. Meanwhile, the Delaware or Nevada company often won't file a Florida tax return at all, because it has no employees or physical property in the state.
Tax authorities across the U.S. have been aware of the strategy for many years. A number of well-known companies have used it, including
But because corporate-tax returns are confidential, the scope of the problem in Florida was largely a mystery -- until the state went to court with Circle K in August 2010.
Circle K followed a model similar to those used by others. Circle K Stores, which owned and licensed stores in Florida, paid royalties equal to 1.5 percent of its total sales to "Circle K Enterprises," which owned the trademarks.
According to court records, that reduced Circle K Stores' Florida tax bill by $830,000 in 2005, $990,000 in 2006 and $1.2 million in 2007. But Circle K was just one company among many.
During the Circle K lawsuit, Florida tax auditors revealed that they had found 98 other companies using the same strategy from 2000 to 2011. All the cases had been settled rather than pursued in court, often for 30 percent or less of the amount in dispute. None of the companies was identified.
In some cases, the amounts of money at stake were enormous. One company had been assessed $46 million for back taxes and penalties; another had been assessed $35 million. There was no record of how much either company wound up paying in their settlements.
More companies may be engaging in the practice but have not been discovered in state audits.
One other business has been identified by name as using the strategy in Florida: Reynolds American, the Winston-Salem, N.C.-based tobacco company, which avoided $4.6 million in state taxes from 2005 to 2008, according to documents from separate litigation.
Reynolds settled before its case had advanced as far as Circle K's. It ultimately paid $1.8 million in back taxes -- less than half of the amount initially charged. A spokesman for the company would not comment.
When other states have challenged a company's trademark subsidiary in court, the central question has typically boiled down to whether the state could tax an entity that had no physical property or employees in that state.
But in its lawsuit with Circle K, Florida tax auditors ran into a different issue entirely.
Under Florida law, companies are generally allowed to ignore the money they make from royalties when computing their state-income-tax bill. But there is one exception. Miners, oil drillers and other mineral-producing companies are required to count royalty income while doing their taxes. That's partly because royalties can be a major revenue stream for mining and drilling companies.
Lawyers for Circle K flipped that clause on its head. They argued that, because Florida specifically said mineral companies had to include royalties in their taxes, nobody else had to.
The judge agreed. He said Circle K Enterprises was subject to Florida's tax laws -- but also ruled that those very laws meant it owed no tax.
"I don't know why they [lawmakers] put it the way they did it, but clearly royalties have not been something that the Legislature said we're going to tax, except on the mining situation," Francis said during the December 2011 hearing.
Florida quickly settled with Circle K before the judge could enter a potentially precedent-setting written ruling. And the terms of that settlement were sealed.