Finding legal ways to exploit the United States tax code or get around laws that restrict business operations is as American as apple pie, baseball, and all-you-can-eat buffets.
Some methods of tax avoidance or skirting rules and regulations legally have become as common as sneaking candy into a movie theater (which is not illegal). Others show a special level of ingenuity. The three companies below aren't using well-known tax shelters or keeping money overseas to avoid paying Uncle Sam. They're finding new, outrageously clever ways to keep or make money.
All of the methods below are legal. These are companies with leaders who understand that success requires thinking outside the box and finding unconventional ways to keep money in the coffers.
Wait, my Cons are legally slippers?
The vast majority of the sneakers sold in the U.S. are made overseas because labor costs are much cheaper abroad. Those low-priced workers come with a caveat, however, as sneaker imports are subject to a 37.5% tariff. Slipper imports, on the other hand, only come with a 3% tariff.
Converse, a Nike (NYSE:NKE) subsidiary, has found a way to take advantage of the difference in tariffs by legally turning its classic Chuck Taylor canvas sneakers into slippers. Of course, the company did not actually turn its sneakers into slippers. Instead it created a patented process which makes its shoes slippers in the eyes of the law.
The legal definition for a sneaker, at least as far as the tariff is concerned, means footwear with a rubber sole. Slippers are defined as having a fuzzy sole. If the majority of a shoe's sole is one or the other, legally you know whether you have a sneaker or a slipper. For its Chuck Taylors, Converse still makes its classic shoes with a rubber sole, but that surface is covered in a fuzzy material which wears off quickly once the "sneakers" are actually worn.
Nicholas Mortimer of the Strategic Sourceror explained the process:
Each pair of the company's Chuck Taylor canvas sneaker -- its most popular item -- has a thin layer of felt on parts of the sole. The felt has no functional purpose or significance and deteriorates after walking a few miles. Because the felt covers a majority of the sole, according to the U.S. government, Converse's sneakers are classified as slippers, which results in a far lower tax that is applied upon import.
Converse has exploited the fact that the law does not judge intent, as Chuck Taylors are clearly sneakers. This is actually good for consumers since it has helped keep the price of Converse's signature product down. The company sells high-top sneakers on its website starting at $55, much less than many other popular sneaker brands.
Wait, mutants aren't people?
In the various movies about Marvel's X-Men, as well as in many of the comic books, one of the on-going plot-lines is how mutants are legally classified. Are they people? A separate species? Something else entirely? In the movies, the various mutant characters either support the idea that they are superior to humans or different, but still human and deserving of the same rights any person would be.
It seems that Disney (NYSE:DIS), which now owns Marvel, has a different idea. The company has been arguing that mutants are in fact not people at all, according to Slash Film. The company is doing this not for the moral reasons argued in the movies, but because "toys manufactured in other countries and imported into the U.S. are subject to taxes, but those taxes are lower if the toys represent non-human characters," the film site reported.
The companies lawyers contend that Wolverine, Magneto, Cyclops, and the rest are actually "representing animals or other non-human creatures (for example, robots and monsters)."
Two international trade lawyers discussed the issue on a Radiolab podcast pointing out that "dolls," which are toys that represent humans, are taxed at 12%. Toys, on the other hand, are taxed at 6.8%. That gives Disney a powerful incentive to have its mutants classified as non-human, though you have to imagine Professor X would take issue with them doing so.
The liquor is free, but the bottle will cost you
Jack Daniels, a Brown-Forman (NYSE:BF-A) brand, has famously had to deal with the fact that its factory is located in a dry county. That has prevented it from selling its signature whiskey at the facility or offering paid tours where drinks are served.
The company, however, has made a deal with Moore Country, Tennessee, where the factory is located, which will allow it to skirt the law. The county is staying dry, but Jack Daniels will be able to give its liquor away, Nashville Lifestyles reported. But, while the liquor is free, the "extended" tour, which is the one that includes stops for sampling, costs more. The same thing is true in the gift shop, where the whiskey costs you nothing, but the bottle it comes in costs about as much as a bottle of Jack Daniels would.
It's a wink-wink workaround that has been used by membership-based clubs for years. Those facilities in many areas can't sell whiskey, but they can charge for pouring, glasses, or even allowing members to store their own alcohol in the facility.
It's about leadership
While all three of these companies are exploiting the law, they aren't breaking it. The leaders at Converse, Marvel, and Jack Daniels have studied the rule book and are using it to their advantage.
Daniel Kline has no position in any stocks mentioned. His ill-advised decision to wear light blue Chuck Taylors in seventh grade was appropriately punished by his classmates. The Motley Fool recommends Nike and Walt Disney. The Motley Fool owns shares of Nike and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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