Over the years, Wal-Mart has devoted much of its vaunted genius
to
devising new ways to exploit people. In its latest ploy, the
company has targeted state taxpayers in a convoluted Ponzi scheme
that leaves the retailer looking like a common tax deadbeat.
In February of 2007, the Wall Street Journal ran a story
revealing
that Wal-Mart pays billions of dollars a year in rent for its
stores, but in 25 states -- most of them east of the
Mississippi -- it has been paying most of that rent to itself, and
then deducting that amount from its state taxes. By so doing,
Wal-Mart has avoided paying several hundred million dollars in
state taxes.
Based on a scheme developed by its accounting firm, Ernst &
Young,
for a "local tax reduction strategy," Wal-Mart's financial
self-dealing allows it to pay rent to itself through a maze of
eight corporate subsidiaries created in November of 1996, including Real
Estate Investment Trusts (REITs). The rent appears as an
expense on state tax forms, and is thus deducted from its taxable
revenues. Under the agreement with itself, Wal-Mart pays 2.5% of
gross sales monthly as rent to its own REIT, which then wires the
money quarterly to Wal-Mart Property Company in the form of a
dividend, which is then paid to Wal-Mart Stores as a tax-exempt
"dividends received."
All of these transactions are handled through a "cash management
agreement" between the corporate parties. Neither the REIT nor the
Property Company ever had any employees. The REITs don't pay
taxes, as long as they pay 90% of their income out in dividends to
shareholders. In Wal-Mart's case, the REITs are owned by Wal-Mart
subsidiaries which are registered in Delaware, a state that has no
corporate income tax. Wal-Mart gets the benefit of the rent
expense, but also gets the benefit of the non-taxed dividend, on
the same monies. The dividends escape taxation, and the original
rent that created the dividends is deducted from taxable income in the
states where the "expense" is incurred. The rent, in essence,
goes from one Wal-Mart pocket, into another.
This strategy has been used by Wal-Mart for 11 years. But the
state of North Carolina challenged the tax dodge two years ago,
and disallowed the rental deduction from its taxable income for
the period 1999 to 2002. North Carolina insisted that Wal-Mart
submit "combined returns" for Wal-Mart Stores East, Wal-Mart REIT, and
Wal-Mart Property Company. The state argued that Wal-Mart was
"distorting its true net income." It charged that Wal-Mart Stores
East owned all the stock of Wal-Mart Property Company, which owned a
majority of the shares of Wal-Mart REIT. Wal-Mart paid the bill, but
then sued the state's Secretary of Revenue, Reginald Hinton,
in 2006, charging that it did not owe the higher taxes, because
North Carolina did not have the right to consolidate its expenses
in North Carolina with its subsidiaries in Delaware.
After the lawsuit was filed, both sides asked the court for a
Summary Judgment, which is a decision made on the basis of
statements and evidence presented for the record without a trial.
It is used when there is no dispute as to the facts of the case,
and one party is entitled to judgment as a matter of law. On
December 31, 2007 an Emergency Special Judge in Wade County,
North Carolina Superior Court, ruled in favor of the state of
North Carolina, and against Wal-Mart's lawsuit. The Judge ruled
that North Carolina has the statutory right to force a
corporation to state its "true net income" through a consolidated
statement, "so as to properly reflect the extent of the
corporation's activities in the state." Judge Clarence E. Horton
ruled that Wal-Mart's treatment of rent had no "real economic
substance," and was only a mechanism for reducing the taxes it
pays to the state of North Carolina.
Wal-Mart's was seeking a $30 million refund in taxes for
Wal-Mart, and $3.5 million for Sam's Club, including interest
and penalties, based on what state officials had charged the
company after disallowing its rental deduction. The Wall Street
Journal estimates that this tax avoidance scheme saved Wal-Mart
$230 million over a four year period. "Plaintiffs do not deny
the facts demonstrating the circular journey taken by the
'rents' paid by these plaintiffs," Judge Horton said, "but
contend that on each leg of the journey plaintiffs were only
taking advantage of a lawful deduction afforded them by
then-existing tax law. Such a piecemeal approach exalts form
over substance, however...There is no evidence that the rent
transaction, taken as a whole, has any real economic substance
apart from its beneficial effect on plaintiffs' North Carolina
tax liability. It is particularly difficult for the court to
conclude that rents were actually 'paid,' when they are
subsequently returned to the payor corporation."
Wal-Mart has also been burned on this tax scheme in
Wisconsin.
According to Wal-Mart, they paid more than $26.2 million in
state and local taxes in the state of Wisconsin in FYE 2007.
Unfortunately, the state of Wisconsin does not agree with that
figure, and is charging that the world's richest retailer owes
the state millions in back taxes.
Research by the Citizens for Tax Justice (CTJ) found that
Wal-Mart used an array of tax loopholes, such as the REITs, to
pay less than half of the state income tax that it would have
been expected to pay. In Wisconsin, on estimated income of $852
million from 2000 to 2003, Wal-Mart paid only $3 million in
state income tax -- a tax rate of 0.35% versus the 7.9%
statutory tax rate corporations are supposed to pay in
Wisconsin. "In effect, Wal-Mart pays rent to itself and takes a
deduction for doing so," according to the Wisconsin Revenue
Department claim.
The REIT pays the rent as part of a dividend to the parent
company. The dividend is tax-free under state and federal law.
The state Revenue Department says that Wal-Mart set up these
subsidiaries for the sole purpose of avoiding taxes, and on
that basis the state disallowed the deduction, and now wants
Wal-Mart to pay its bills -- which prompted Wal-Mart to
challenge the state's ruling.
State officials in Wisconsin charge that by using this
mechanism, Wal-Mart has dodged millions in tax payments by
paying rent on 87 Wisconsin properties. The state Department of
Revenue calls Wal-Mart's actions an "abuse and distortion of
income." The Arkansas-based retailer now owes the taxpayers of
Wisconsin $17.7 million in corporate taxes and interest just
for the years 1998, 1999, and 2000, according to the Milwaukee
Journal Sentinel. Figures for more recent years have not been
made public. Wisconsin Revenue Department lawyers told the
newspaper that because Wal-Mart has not been paying its fair
share of taxes, it has been hurting the public schools, local
police and fire departments and the highways the company uses
in the process of doing business in the state.
Because Wal-Mart doesn't pay its fair share, other individual
taxpayers and small businesses in the state have to assume an
unfair burden. These other taxpayers, the state said, are not
wealthy corporations who are able to set up "elaborate
mechanisms," to avoid paying taxes. The state's Tax Appeals
Commission is currently hearing the case.
"Anything Wal-Mart can do to lawfully lower its costs allows
the company to pass it along through lower prices," a company
spokesman told the Milwaukee Journal Sentinel. "This is a
lawful (tax) structure in Wisconsin." It can also be argued
that Wal-Mart did not "pass it along" to consumers, but
pocketed the difference as part of its $11.4 billion in profits
last year. The Wal-Mart "tax deadbeat" story has forced some
state lawmakers in Wisconsin to propose language in the state's
budget that would outlaw the "abusive" tax scheme that Wal-Mart
apparently still uses to avoid paying taxes. State Senator Russ
Decker (D-Schofield), said Wal-Mart and others who use the
deduction are "scamming the system, and we ought to plug the
loophole." Senate Majority Leader Judy Robson (D-Beloit)
accused Wal-Mart of being the "poster child" for corporations
that don't pay their fair share of taxes. Other competitive
retailers in Wisconsin, like Sears and Kohl's, told the
newspaper they do not use the "captive REIT" technique to avoid
state taxes. Wal-Mart is Wisconsin's largest private employer,
with 28,920 workers.
If the Tax Appeals Commission comes down against Wal-Mart,
the
retailer is expected to take its case to court, which means
Wisconsin taxpayers aren't going to see any relief from
Wal-Mart for many years to come. "It's just a fairness issue,"
one State Senator told the Journal Sentinel. "Go down on Main
Street -- these businesses are being economically disadvantaged
to these big corporations."
A number of other states, like Massachusetts, are considering
"combined reporting" tax reform, which requires corporations to
report all their revenues in one state, ending the ability to
assign costs to other states and escape taxation. All related
companies would have to file one income tax return. In
Massachusetts, Wal-Mart says it paid nearly $19 million in
state and local taxes in 2006. Assuming roughly $11 million of
that was state income tax, the retailer also avoided $5.4
million by deducting rent it paid to its Delaware-based REIT as
a business expense, lowering its taxable income. The company
also cost taxpayers $7.2 million in health care costs for 6,000
Wal-Mart workers and dependents on Medicaid. The net result is
that Massachusetts taxpayers actually lost money on the 45
Wal-Mart stores in their state. Massachusetts Governor Deval
Patrick has drafted legislation that would close Wal-Mart's
loophole in the Commonwealth, but the Massachusetts General
Court has not taken up the bill.
Wal-Mart maintains that it is only taking advantage of a
lawful deduction afforded by then-existing tax law. But the North
Carolina Court has referred to this corporate behavior as a
"circular journey" of money. "Such a piecemeal approach exalts
form over substance," the court wrote. Most Wal-Mart customers
are also taxpayers, and the retailer's elaborate efforts to
avoid paying taxes, robs each of its taxpaying customers of
revenue that could have been use to educate children, pave
roads, or bolster local aid for police and fire services.
Wal-Mart argues that it passed these cost savings onto its
customers. But the reality is, Wal-Mart the tax deadbeat,
passed these costs onto its unsuspecting customers by not
paying its fair share of state taxes. This week's court
decision is likely to have legal implications across the
country, because Wal-Mart has used the methodology for more
than a decade in so many other states.
Wal-Mart has decided that it will appeal the
North Carolina decision, so state taxpayers can expect to wait a yeare or
longer for any resolution of this claim. "We believe that all taxpayers
should have the right to rely on clearly defined tax laws that are
reasonably and fairly enforced," a company spokesman said. In this case,
"all taxpayers" refers to the Wal-Mart corporation -- not the rest of the
American taxpayers who are picking up Wal-Mart's deadbeat tax bill.
Al Norman is the founder of sprawl-busters.com and the author of "The
Case Against Wal-Mart."