Tax avoidance by hugely profitable corporations is widespread in the Western world. Though legal, the practice of paying off the brightest and the best accountants money can buy, so that super rich business owners can exploit every loophole in the book to minimise their tax bill, is morally questionable and repugnant to the working poor and the middle class alike. That's why both Presidential candidates have talked a lot of hot air about tackling this pervasive problem in their ongoing election race. It's also why MPs in the UK are dragging the head of Her Majesty's Revenue and Customs (HMRC) to answer questions in front of parliamentary committees about international coffee giant Starbucks only paying the paltry sum of £8.6 million in corporation tax in 14 years on £3 billion worth of sales, and not even giving a penny in the last three years.
Speaking of politics, former WWE CEO Linda McMahon has a very real chance of becoming the new U.S. Senator for the state of Connecticut in three weeks time, as the latest polls suggest her race with Chris Murphy is currently a statistical dead heat with only one debate left to go tomorrow afternoon. The issue of tax avoidance hasn't come up so far in their campaigning, but that may very well soon change due to breaking news by Irv Muchnick today.
Over the weekend, Muchnick anonymously received an internal WWE document from either a current or very recent employee that details the company's history of tax audits over the last eight years. This single piece of paper could prove to be some much needed ammunition for the struggling local Democrats, as it details how WWE came to a $4.4 million settlement for either erroneously or purposefully dodging taxes between May 2005 and December 2007 after an audit by the state of Connecticut. They also "agreed on going forward [accounting] methodology," to prevent such a sizeable mistake from ever happening again. Over the next few years, there were also settlements with the states of Minnesota, New York and California for sums of $23K, $112K and $120K, respectively.
That agreement may explain why the next tax audit of WWE by their home state, prompted by allegations that the company was misclassifying their wrestlers as independent contractors during Linda's first run for Senate in 2010, came up virtually spotless. In May 2011, WWE publicly crowed about how they only had to cough up $7,000 in a settlement for accidentally misclassifying a handful of casual employees in their video department as independent contractors after that investigation was completed. It's funny how Linda McMahon never got around to publishing the results of these other tax audits during her time as WWE CEO, after repeatedly telling Congressman Murphy to come clean with the people of Connecticut about his own personal finances and insinuating that he used his position to curry favours and obtain a sweetheart loan deal with Webster Bank.
The McMahon family being hypocrites again, well I never! It's such a great shame that after how so many of their employees "voluntarily" stood up for WWE in October 2010 that exactly two years later there's just one rogue element who wants to dish the financial dirt on Linda McMahon when the chances that she could raise the respectability of the company by winning a seat in the U.S. Senate are at their greatest. The charges of tax dodging on top of taking 36 years to pay off all her bankruptcy debts, could very well prove to be the difference maker on polling day and become her political kiss of death, after what has been a very tightly run campaign that has made remarkably few serious unforced errors, despite all the potential pitfalls she's faced along the way.
Update: Irv Muchnick has just published WWE's official explanation for the $4.4 million tax settlement after having a conference call earlier this afternoon with WWE's CFO George Barrios and their spokesman Brian Flinn. I'll quote the salient details, as Irv does an excellent job of explaining a complicated and convoluted technical accounting disagreement between WWE and the state of Connecticut:
As Barrios explained it, there are two basic methods for calculating state taxes of corporations that operate nationally or even internationally (WWE does business in all 50 states and in about 50 countries). One is simply to calculate sales within the state - the so-called "single-factor" method.
Connecticut is among the majority of states that use a "multi-factor" approach, which generally results in higher corporate tax liabilities. Rather than just interpolating sales within the state, the multi-factor method requires the calculation of sales volume, number of employees, and size of assets for the company within the state, and weighing them in proportion to the universe of sales volume, employees, and assets.
Though Connecticut is a multi-factor state, its tax code also has a "broadcaster exemption," which allows companies in the broadcasting industry to default to the single-factor method. (It is easy to speculate that ESPN, based in Bristol, Connecticut, is behind the broadcaster exemption.) WWE held the position that, while it markets across multiple platforms (live arena events, magazines, merchandise, Internet, etc.), it is currently, at its essence, a company in the business of purveying content for broadcast television. The state of Connecticut disagreed with WWE's interpretation of ambiguous language in the tax code regarding this.
Barrios said WWE considered litigating the dispute but ultimately worked out a compromise with the state. Using very round numbers, Barrios estimated that a single-factor tax calculation would yield an annual state tax bill for the company of approximately $1 million. Under multi-factor calculation, it would be around $2 million. The $4.4 million settlement in the document I published earlier represents the two sides' agreement to set the figure in the middle. So that's around $500,000 annually over and above what WWE already had paid for the years from 2005 through 2010, plus penalties and interest. The "going forward methodology" cited in the WWE document is a stipulation by the two sides that, in future years, there will be an agreed-upon mix of single- and multi-factor methods in the calculation of WWE's Connecticut taxes.