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September 14, 2005
Delaware of the West ain't what it used to be
One of the publications I sold on telling the tale was the San Francisco Chronicle. When the Chronicle's story was published, I was amused to see that it failed to report the best evidence it had of the way Nevada worked - that the Chronicle Publishing Company itself was a Nevada corporation. The phrase "Delaware of the West" gets 193 hits on Google, and most of them refer to Nevada, though other states make the same claim. On Sunday, the Los Angeles Times reported that California's State Controller Steve Westly and his California Franchise Tax Board is going to start investigating whether businesses that operate in California but incorporate in Nevada are committing tax fraud. There are a number of firms that sell incorporate-in-Nevada kits or services, and at least one of them has been drawn into the California probe. These firms provide resident agents so that a business's executives never need to set foot in Nevada. And that has become an issue in the California investigation - leaflets that promise "Stockholders, directors, and officers need not live or hold meetings in Nevada, or even be U.S. citizens" are being treated as evidence of corporate scofflawism. The truth is that if California or any other state wants to get more taxes out of corporations registered elsewhere, no investigation is needed. States have been doing it for years. A corporate domicile is not needed to collect taxes from companies doing business in a state where they are not incorporated. A more interesting issue is Nevada's role as the "Delaware of the West." I keep wondering, Why is this good? Nevada gets very little out of being the home state of thousands of absentee corporations. In fact, there is reason to believe it costs the state money. Being Delaware gets the state corporate filing fees and puts a few people to work for resident agent companies. But the state also loses money since one of the factors that congressional committees and federal agencies take into consideration in distributing federal funding among the states is the number of corporations per capita. By that indices, Nevada looks very rich and not at all in need. In addition, being friendly to businesses and their management means being unfriendly to consumers and stockholders. Laws governing corporations inside and outside of Nevada can shield the companies from liability, pit shareholders against corporate officers, and conceal important information about the corporation. New Jersey, which since 1913 has assiduously avoided registering absentee corporations and taxes those that incorporate but do not operate in the state, has found those polices to be a financial windfall that is credited with saving the state from a sales tax. Even in Delaware, the benefits to residents are dubious. One study of the state says that most financial gains "go to corporate transactional lawyers and corporate litigators." Moreover, the courts have shown progressively less respect for state laws that shelter corporations. (It's little known that Nevada's onetime quickie divorce industry did not exactly bewitch the courts, either - Texas, Pennsylvania, and West Virginia were among the states that overturned Nevada divorces.) One federal court decision on a Nevada corporation said, "Nor do we accept [litigant's] suggestion that our analysis should reflect Nevada's desire to provide management-friendly corporate law." And the whole idea of pampering corporations may not enjoy the status it once did. Utah's banking commissioner said a few years ago, "I have been told Utah is becoming the Delaware of the West. I am not comfortable with that moniker..." Myers is a veteran capital reporter. His column, "Against the Grain," appears here on Wednesdays. |
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