When Florida enacted a corporate income tax in 1971, the governor and Legislature gave most small businesses a break.
Their goal: Spare mom-and-pop firms while making the state's largest companies pay 90 percent of the tax.
But look at some of the mom-and-pops who don't have to pay today:
# Oil man William Ingraham Koch has a fortune estimated at $650-million, a $24-million mansion and a West Palm Beach energy company, Oxbow Corp., with $450-million in estimated sales last year.
# Vero Beach's Thomas L. Corr presides over George E. Warren Corp., a petroleum distribution firm with less than 20 employees but $2.6-billion in sales, making it the sixth largest private company in Florida.
# Onetime whiskey sales agent Harvey R. Chaplin of Miami runs Southern Wine & Spirits, the largest distributor of wine and spirits in the country with $1.1-billion in sales.
These executives all have money, talent, privilege and a penchant for charitable giving. And their companies legally sidestep Florida's corporate income tax.
"We don't pay any," said the 74-year-old Chaplin, whose firm delivers market dominance and hefty campaign contributions. "It's not only us."
He's right. More and more of Florida's largest, most sophisticated private companies are using exemptions created for small businesses to escape paying the corporate income tax.
At least 11 of the top 30 private companies based in Florida are structured in ways that allow them to bypass the tax, a St. Petersburg Times survey shows.
"That's the reason I came here -- it's tax friendly," said Palm Beach's Koch, 63. He makes no bones about why he moved Oxbow to Florida after Massachusetts tried to raise his taxes.
He said, "If they're going to treat me that way, screw 'em."
As the Times disclosed in October, 87 percent of Florida's estimated 1.5-million businesses are not required to file a state income tax form, much less pay the tax. Of the 238,455 companies that did file a return in 2001 (the last year statistics were available), nearly 90 percent paid nothing. And 98 percent of the taxes came from just 2.2 percent of the corporate filers.
Moreover, corporate tax collections as a percentage of state general revenue -- now at less than 5 percent -- are at their lowest point since 1972-73, the first full year of the tax.
In a report last month, the staff of a state Senate committee estimated that exemptions for certain types of businesses could cost Florida between $760-million and $910-million a year in tax revenue.
Just half of that amount would pay for prekindergarten for all 4-year-olds, a program mandated by Florida voters last year.
Florida business executives who take advantage of tax exemptions say they are merely following the advice of their accountants or exercising their rights to lower their taxes. They deny avoiding their corporate obligations, noting they still pay millions in fees and property, sales and intangible taxes.
"Florida makes up for the lack of income tax with some of the other fees they charge," said Jeffrey Seaman, founder of the nation's largest furniture retailer, Seffner-based Rooms to Go. It posted $1.3-billion in sales last year but didn't have to pay Florida income tax.
Larry Fuchs, who served as executive director of Florida's Department of Revenue from 1992 until 2000, says you can't blame a business for making use of tax exemptions.
Exemptions are created by the Legislature, he noted, and "it's up to them to have the intestinal fortitude to close them."
The "Florida bonus'
To be sure, many businesses that use the exemptions are small, with one owner and one or two employees sometimes struggling to make ends meet. And not every big business uses the exemptions.
Haskell Co., a behemoth construction firm in Jacksonville, is organized as an old-fashioned corporation. It had $652-million in sales last year, and it pays hundreds of thousands of dollars in Florida income tax every year.
Its founder, Preston H. Haskell, thinks Florida's taxes may be too low.
"We lag badly behind in education and social services," said Haskell, a Republican. "We need to do a lot more in terms of transportation."
The state, which has a flat 5.5 percent tax on corporate profits, should consider a graduated corporate income tax based on a company's ability to pay, he said.
"High growth and low taxes are a formula for a Third World country," Haskell added. "We might be headed in that direction if we don't step up to the plate with more revenue."
In the old days, large companies were almost always organized like Haskell -- as regular corporations taxable under Subchapter C of the federal internal revenue code.
In a nutshell, these C corporations pay taxes twice -- once as a corporate entity and again on the dividends paid to the corporation's shareholders.
In the 1950s, however, Congress began offering small businesses a break. It allowed companies with up to 10 shareholders to bypass the federal corporate income tax. Instead, they were allowed to pass income through to their shareholders, who then paid tax on that income when they filed their personal federal returns.
These businesses became known as S corporations, taxable under Subchapter S of the federal code. Accountants call them "flow-through entities" because their income flows through to the owners.
Across the country, companies organized as S corporations no longer had to pay federal income tax. In Florida, they also got what accountants call a "Florida bonus." Since the state has no personal income tax, S companies can escape that tax completely (except in rare cases where they do owe some federal tax).
"S corporations became a great tax dodge," said Francis "Pete" Millett, staff director of the Florida House Committee on Finance and Tax in 1972-74.
When the Legislature enacted the state corporate income tax in 1971, its longtime champion, then-state Rep. Ralph Turlington, had no idea how popular S corporations and other flow-through entities would become.
"These outfits have been used much more broadly than we imagined," Turlington said. "If it had been today instead of then, we might well have taken a different stance."
Subchapter S heaven
As a convenience to business and to simplify tax administration, the Legislature decided decades ago that Florida's tax code should mirror the federal code. That meant that Florida embraced the same breaks Congress gave to businesses.
Then came the tax-cutting 1980s. With changing federal tax rates and looser rules, it got easier to become an S corporation. Eventually, Congress raised the allowable number of shareholders to 75. The number of C corporations continued to decline while the number of S corporations grew.
Now, if you are a resident of Florida and earn $100,000 from your S corp, you pay $28,000 in federal income tax. But if you live just over the border in Georgia, you still pay $28,000 to the IRS, plus an additional $6,000 in personal income tax to Georgia.
That's why Florida gained international fame as Subchapter S heaven.
"My friends in New York viewed Florida with a great deal of jealousy," said Carlos de Cespedes, chief executive of Pharmed Group, a Miami medical supplies distributor that started as a small, family, S corporation in 1981 and grew into a global giant with $565-million in annual sales.
"It made a lot of sense to be a Subchapter S because you pay taxes only once" -- the personal federal income tax paid by shareholders.
Luther Coggin, a top benefactor of the Republican Party, built his fortune through car dealerships. From 1970 to 1993, his Coggin Automotive Corp. operated as a regular corporation in Jacksonville. It owned other corporations, which operated the dealerships.
In 1993, Coggin was 62 and thinking about corporate succession. He decided to reorganize to give key employees a bigger stake in the company's fortunes.
After a series of complex transactions, Coggin became an S corporation.
At first, the IRS alleged it was a tax dodge, but the courts ruled for the company.
"It wasn't done for tax avoidance," said Nancy Noble, an official at Coggin, which is now part of a publicly traded company. "There were some years we were tax-exempt...In years we did not pay state income tax, we paid Florida intangibles tax that other states don't have. And we remitted millions in sales tax to the state."
The Florida Department of Revenue says it doesn't know how many regular corporations in Florida have restructured to become S corporations.
A 1992 Florida tax reform commission estimated that as many as 40,000 businesses may have restructured, in part to avoid the corporate tax. It recommended the Legislature scrap exemptions for S corporations and partnerships.
But instead of closing loopholes, business-friendly lawmakers added more.
When he was governor, Lawton Chiles used to cite Fort Lauderdale's Alamo Rent A Car as the poster child for why Florida's exemption for S corporations should be closed.
"Alamo pays nothing," he said in 1992. "That's not fair. It's wrong."
Now, the Times' survey found, big firms organized as S corporations include Daytona Beach's NASCAR, which has annual revenues estimated at $3-billion and is piloted in financial secrecy by the billionaire France family; Southeast Personnel Leasing, a fast-growing Tarpon Springs staffing services firm that estimates $1-billion in sales this year, and Boca Raton's Purity Wholesale Grocers Inc., whose founder parlayed $15,000 into one of Florida's largest private businesses.
"Florida should be proud of its little businesses that grow big," said Seaman, whose Rooms to Go grew from two stores in Orlando to a furniture juggernaut 13 years later. His company settled in Florida because of its growing population, not its low taxes, he added. "We chose Florida because we thought we'd sell a lot of furniture there."
Limited liability, limited taxes
In recent years, the governor and Legislature went along with other federal tax changes that allow big business to avoid state income taxes. And they created their own exemptions.
In 1998, for example, they exempted limited liability companies from the corporate income tax, prompting a surge of freshly minted LLCs.
LLCs and their spinoffs, limited liability partnerships (or LLPs), are now business organizations of choice for lawyers, doctors and accountants who want to avoid liability for any misdeeds by their partners.
"Businesses can simply form as LLCs rather than as corporations and avoid all Florida corporate taxes," the Senate staff report says. It estimates that taxing LLCs and master limited partnerships (publicly traded businesses usually held by hundreds of owners) could generate $60-million a year in tax revenue.
In 1997, the year before the Legislature passed the exemption, there were 5,392 LLCs in Florida. By December 2002, the number had grown to 38,639 -- an annual growth rate of 69.6 percent.
LLCs listed in Florida's corporate registry include Wal-Mart.com USA LLC, Banana Republic (Florida) LLC, Daytona International Speedway LLC and Southeast Toyota Distributors LLC.
Southeast, the nation's largest franchised Toyota distributor, is the flagship company of Deerfield Beach-based JM Family Enterprises Inc., ranked by Forbes as the 15th largest private company in the country with sales of $7.6-billion.
It has 3,500 employees nationwide, a sprawling company headquarters with a swimming pool, a cadre of influential lobbyists and a boulevard in Broward County named after its founder, Jim Moran.
According to Forbes, the 85-year-old Moran is worth $1.4-billion. In 1984, he pleaded guilty to income tax evasion after prosecutors accused him of diverting $8.1-million from Southeast Toyota to a secret bank account in the Cayman Islands. He was fined $35,000, placed on probation and ordered to do community service.
He set up a training center for teenagers to learn the auto trade and went on to become a philanthropist and political powerhouse.
Last year, JM Family representatives helped Gov. Bush push reluctant state senators into adopting new rules that sped up deductions for equipment bought by businesses. At the time, state budget planners estimated the rules would slice corporate tax collections by more than $200-million in the first year alone.
"We pay all taxes as required by law," the company said in a statement to the Times, declining to elaborate. "JMFE is a privately held company and, as such, does not disclose much of the information you requested."
In 1998, JM Family said it hadn't paid a dime in Florida corporate income taxes in at least six years, the Broward Daily Business Review reported. JM Family also said it was operating at a loss.
Some months later, Southeast Toyota won what the Review called a "smorgasbord" of state and local financial incentives worth $15-million to keep its plant from moving out of Florida.
"Life ain't fair'
Some executives who take advantage of Florida's tax system make no apologies for it.
"I've done a lot of sailing and, well, the rules aren't fair," said Bill Koch, the oil man. "Well, life ain't fair. You play according to the rules that are given to you."
Koch, son of the founder of the nation's second-largest private conglomerate, is known for his $9-million wine collection, the $68-million he spent to win the America's Cup sailing trophy and his art cache with works by Picasso, Matisse and Renoir.
He is also known for litigiousness. When Massachusetts denied him an abatement on taxes he paid in a 1983 stock transaction, Koch sued.
He purchased and assigned the stock to Delaware corporations, and Massachusetts argued that he used those corporations simply to avoid taxes, not for any legitimate business purpose.
After a 10-year battle, the courts sided with Koch. He got $46-million - and left Massachusetts.
Koch acknowledges the quality of Florida's public schools is a problem. But he's dead set against making companies like Oxbow pay a Florida income tax.
After all, he says, he already pays a half-million dollars in property taxes on his 40,000-square-foot Palm Beach home, which was featured in the March 2002 edition of Architectural Digest magazine.
Giving money to the politicians is "pouring money down a rat hole," Koch said, adding that he has given away more than $150-million to schools, hospitals and other causes.
"Nonexistent to impossible'
Koch apparently need not worry. Gov. Jeb Bush and many legislative leaders oppose changing Florida's business friendly tax structure.
Elsewhere, however, some cash-strapped states looking to deliver on commitments to public education, roads, health care and prisons are trying to end corporate tax exemptions, saying all businesses must pay their share of the cost.
At least 10 states now impose taxes on flow-through companies like S corporations.
New Hampshire, for example, makes all businesses, including S corporations, pay a profits tax. Texas taxes S corporations the same way it taxes regular corporations. And in Tennessee, where S corporations were already subject to tax, the Legislature in 1999 extended its business-activity tax to limited partnerships and limited liability partnerships.
In Florida, though, any politician who wants to rethink the corporate tax system faces a perilous road.
State Sen. Walker "Skip" Campbell, D-Fort Lauderdale, chairman of the committee that produced the staff report on corporate tax loopholes, resigned as chairman last month, the day before he had promised to begin a drive to close some loopholes.
Campbell said he resigned at the request of Senate President Jim King, R-Jacksonville. King said Campbell resigned after King told him there was little hope of tax reform in the legislative session that begins March 2.
"The chance of passing anything is from nonexistent to impossible," agreed Sen. Steve Geller, D-Hallandale Beach, a member of the committee.
No one wants to tax Joe's Pizzeria, Geller said, but "companies with hundreds of millions in revenues don't need the same break."
Gov. Bush opposes rethinking tax exemptions for S corporations and other flow-through entities, spokeswoman Alia Faraj said, because they tend to be "extremely small companies" that already pay many other taxes. And imposing an income tax on them, she added, would mean higher consumer costs and job loss.
"Just because you can tax a business does not mean that you should tax a business," she said.
If Florida were to close some of its exemptions, it could continue to spare mom and pop while imposing the corporate income tax on only bigger businesses, said Richard Pomp, a professor at the University of Connecticut Law School and expert on state taxes.
For example, Florida could exempt businesses with fewer than 10 employees, he said. Or it could tax just the businesses with a certain level of gross receipts. Or it could exempt all businesses with fewer than a certain number of shareholders.
"There are lots of ways you can get at smallness so the tax would not hit small business," Pomp said. "It's not all that difficult."
- Times researchers Cathy Wos and John Martin and computer-assisted reporting specialist Constance Humburg contributed to this report.