The Orlando-based company, whose brands include Marriott Vacation Club and The Ritz-Carlton Destination Club, will defer approximately $40 million in federal and state income taxes this year by taking advantage of laws allowing people and businesses to spread out tax payments that stem from sales financed over time. The company expects to defer another $10 million in payments annually for at least the next few years.
A number of other large time-share developers — including Wyndham Worldwide Corp., Hilton Worldwide Inc. and BFC Financial Corp., parent company of Bluegreen Vacations — say they use the same method to push back some of their tax payments. It has become an important way to free up cash for the industry, which carefully structures its sales to legally qualify for the favorable tax treatment.
Marriott Vacations' immediate tax savings — nearly triple the $16 million profit the company reported last year — are a window into the lucrative world of corporate-tax planning. Across the country, businesses of all types are using sophisticated strategies to defer and reduce their corporate-income tax bills, collectively saving hundreds of billions of dollars a year.
The result: Although the United States' 35 percent corporate-income tax rate is now the highest in the developed world, many companies actually pay far less. A new study by the watchdog arm of Congress found that large, profitable U.S. corporations paid income taxes in 2010 at an effective rate of 12.6 percent —about one-third the statutory rate.
Marriott's time-share business, which was spun off from hotel giant Marriott International Inc. in late 2011, hopes to find further tax savings in the future.
"As part of standing up our new tax process in connection with the spinoff, we are focused on opportunities to improve cash taxes, as well as reduce our overall effective tax rate," Marriott Vacations Chief Financial Officer John Geller said this month during a conference call to discuss the company's second-quarter earnings.
The average time share costs about $19,000, according to research by the American Resort Development Association, and units sold by premium brands such as Marriott typically cost even more. Many buyers chose to finance their purchases through the developer.
When that happens, the time-share company can choose to pay its income taxes on the profits stemming from those financed sales using what's known as the "installment method." Instead of the full amount of income tax in the year a sale occurs, the company pays it over time as the buyer pays back the principal on the loan.
The move has no bearing on a company's public profitability, as they can still immediately report the full profit to investors. The choice affects only the separate set of books the company maintains for tax purposes.
Financing underpins much of the time-share industry's sales. Marriott Vacations finances approximately 45 percent of its time-share sales, typically through 10-year loans that carry interest rates of about 13 percent.
While installment taxes are commonplace across the industry, few outsiders understood just how lucrative the practice was — until Marriott announced this month that it would start using the technique.
Primarily because of that shift, Marriott Vacations was able to more than double its projected free cash flow for 2013, from about $60 million to about $130 million. While Marriott will still have to pay the taxes eventually, deferring them frees up cash now for the company that could be used now in a variety of ways.
"Money's worth more today than it is tomorrow," said Jeff Hansen, Marriott Vacations' vice president for investor relations.
Robert Higginbotham, an analyst with the investment bank SunTrust Robinson Humphrey, said the move will help the company with its plan to return cash to shareholders, either through dividend payments or share repurchases — a move he said investors are eagerly awaiting.
"To the extent that they generate cash flow, investors are going to look for some of that cash to come back to them, or they're going to look for that cash to be profitably deployed," added Robert LaFleur, a lodging-and-gaming analyst with the investment bank Cantor Fitzgerald L.P.
Michael Duncan, senior vice president and controller of Orlando-based Wyndham Vacation Ownership, said Wyndham has been using the installment method for many years. Wyndham is the market leader in the time-share industry, with about 11 percent of all units, according to SunTrust research, and annual revenue of about $2.3 billion.
No. 2 Marriott Vacations owns about 7 percent of all time-share units and generated about $1.6 billion in revenue last year.
Duncan declined to say how much income tax Wyndham defers annually, though he said his larger company's savings were proportional to Marriott's.
A spokeswoman for Disney Vacation Club, the time-share arm of the Walt Disney Co., would not discuss the unit's taxes. Representatives for Starwood Hotels & Resorts Worldwide Inc. did not respond to requests for comment. Both companies' time-share businesses are also headquartered in Central Florida.
Analysts say one reason Marriott Vacations may not have employed the strategy sooner is that it was overlooked when the company was still a division within the much larger Marriott International, which focuses on hotels. The time-share business began trading as a standalone company in November 2011.
Using the installment strategy has become trickier for the time-share industry as it has evolved away from selling one- and two-week "intervals" in individual resorts and settled instead on selling amorphous "points" that buyers can use at a variety of locations. The Internal Revenue Service has cracked down on at least one time-share developer using the installment strategy after the agency decided the sales were more akin to leases than actual property sales.
To comply with the IRS' interpretation, some time-share developers, such as Marriott, sell their points to buyers in perpetuity. Others sell through contracts of 50 years or longer, often with renewal options. Developers must also transfer the full benefits and obligations of ownership to buyers, such as the right to resell the points.
Time-share tax attorneys are now grappling with how to preserve their installment-tax status even as they develop shorter-term products, which are becoming more popular with consumers.
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