State & Local Tax Blog

Newspaper Calls Wal-Mart State Tax Planning “Corporate Tax Shenanigans”

I find it interesting how the newpapers and other media report about corporate tax matters. Sometimes it’s quite the eye-opener. Take this editorial article in the Carrboro (NC) Citizen which is written by Elaine Mejia who is referred to as the director of the N.C. Budget and Tax Center. In this article she describes a tax planning technique (which I’m sure was done for other than tax-reduction purposes) that was used by Wal-Mart that had the effect of dramatically reducing state income taxes in NC. NC is a separate return state. Following is her description of what Wal-Mart did and take note of the inflammatory adjectives she throws in there. She makes a call for combined reporting — the bain of state income tax consultants.
“At issue is a clever tax scheme that the company used to avoid paying an estimated $230 million in states’ taxes across the country, according to the Wall Street Journal. North Carolina’s share of that was $33.5 million between 1998 and 2002. So what did Wal-Mart due to earn the state’s scrutiny? Essentially, the company put ownership of its properties into a “real estate investment trust.” That trust was owned by Wal-Mart Property Co., a separate holding company. Conveniently, Wal-Mart owned 99 percent of this holding company. It used this complicated set-up to avoid state taxes by making rent payments on its stores to the holding company and then deducting that amount from its tax bills.
“Unfortunately for Wal-Mart, the Department of Revenue didn’t buy it and neither did the judge. In fact, the judge found that the scheme served no legitimate business purpose and was used solely to lower the company’s tax bills.
“What’s lost in most of the media coverage about this case is why it really matters and what can be done to prevent these kinds of corporate tax shenanigans in the future.
“So, why should North Carolinians care about this case? If nothing else, we should care because $33.5 million dollars is at stake. But there are much bigger reasons to care. In North Carolina today, much of our quality of life depends upon healthy public structures — things like an educated workforce, the court system and good roads. It’s these investments that enable companies like Wal-Mart to profit from doing business in our state. When companies like Wal-Mart don’t pay their fair share, two things happen — we forego investments that would improve our quality of life and make our economy stronger and the rest of us pay more. I’d call that a “lose-lose” scenario.
“There is a change we can make to our state tax laws that would prevent corporations from trying many of these types of tax schemes in the future. It’s called “combined reporting.”
“Under this system, multi-state corporations would have to file a report with the state that discloses their entire business structure, including related entities. This would include relationships with holding companies like the one Wal-Mart owned 99 percent of and paid its rent to. Over time, using this strategy to close corporate loopholes would raise hundreds of millions of dollars that could be used for investments in things like education and roads or put back into the hands of working families by expanding the state earned income tax credit.
“Twenty-two states already have combined reporting and five states have adopted this reform in just the last three years. In North Carolina, not one but two bipartisan study committees recently recommended that our state adopt this strategy as well. In the end, this really isn’t about one company. It’s a wake-up call that should prompt us to put into place public policies that are fair to everyone and that will improve our lives and strengthen our economy in the decades ahead.”

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