The NewStandard ceased publishing on April 27, 2007.

Loophole Let Wal-Mart Evade $2.3B in Taxes*

by Michelle Chen

*A correction was appended to this news report after initial publication.

Apr. 18, 2007 – Accusing a retail giant of wriggling out of over $2 billion in taxes, a watchdog group is pointing to a loophole in certain states that lets huge companies pay rent to themselves.

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According to a new analysis of corporate and state financial data, from fiscal years 1999 to 2005, Wal-Mart paid some $2.4 billion in state income taxes, out of $77.4 billion in overall profits. But watchdog groups estimate the company would have owed about $2.3 billion more under state tax rates – calculated at about 6 percent of profits nationwide – suggesting Wal-Mart somehow shrugged off about half of its tax burden.

The report, released by the taxpayer-advocacy group Citizens for Tax Justice (CTJ) and the labor coalition Change to Win, attributes part of the tax gap to real-estate investment trusts (REIT). These trusts enable Wal-Mart and other multi-state companies to funnel money into a fund designated for property investments.

The REIT system has enabled Wal-Mart to effectively double as both landlord and tenant, recycling real-estate funds to itself and then deducting that cost from its tax bill. Court documents recently published by the Wall Street Journal show that Wal-Mart has used the REIT structure to set up the Delaware-based Wal-Mart Real Estate Business Trust, which is run by Wal-Mart employees.

According to CTJ’s sister organization Institute on Taxation and Economic Policy, 20 states, including California and Illinois, have moved to close the REIT loophole by adopting so-called "combined reporting" laws. These policies require the incomes of a parent company and subsidiaries to be reported together, blocking companies from concealing profits held out of state.

A complex real-estate tax shelter allows companies to escape taxes by acting as both landlord and tenant.

Though unable to yield detailed figures for Wal-Mart’s taxes in each state, CTJ did obtain payment data for Wisconsin, which allows tax-sheltering through REITs. Payments from fiscal years 2000 to 2003 amounted to $3 million, or about a third of one percent of Wal-Mart’s revenues in the state, while the standard state-tax rate was nearly 8 percent. CTJ argues that Wal-Mart’s ability to escape 96 percent of the taxes it would ordinarily have had to pay is tied to Wisconsin’s looser reporting requirements.

But to Wal-Mart, the CTJ report describes a legal, widespread use of state tax codes and merely reflects anti-Wal-Mart sentiment among some unions. Company spokesperson John Simley told The NewStandard that to suggest that the company is abusing REITs is "analogous to saying that a person filing their own tax return should not take the deductions that are allowed to them."

"The fact is that those deductions were created for a purpose," he continued, claiming that "the effect for Wal-Mart has been that we have been able to build more stores and, in fact, create more jobs."

A 2003 study by the intergovernmental state-tax agency Multistate Tax Commission found that in fiscal year 2001, state tax-shelter policies absorbed about $3 billion to $7 billion in corporate money that would otherwise have gone toward public resources.

CTJ Director Bob McIntyre said REITs are one of several tax-code "quirks" that help corporations cut taxes. Another notorious "separate-entity taxation" scheme is artificial trademark "holding companies," which have in the past allowed corporations like Toys "R" Us to pay themselves "royalties" when subsidiaries use their business logos.

In a statement announcing the Wal-Mart data, CTJ urged state authorities to "update their laws and require corporations to report the combined nationwide profits of all their subsidiaries, so that schemes and loopholes don’t disguise big corporations’ real profits."


Major Change:

A poorly written headline originally misstated the amount that Wal-Mart would have owed as "Taxes on $2.3B" rather than "$2.3B in Taxes." The amount in the article itself has remained correct.

 | Change Posted April 18, 2007 at 18:20 PM EST

Minor Change:

The original version of this article misstated Wal-Mart's tax payments in Wisconsin as "about a third of one percent of Wal-Mart’s revenues in the state." In fact, the payments amounted to about a third of one percent of Wal-Mart’s profits, or taxable revenues, in the state.

 | Change Posted April 18, 2007 at 23:14 PM EST

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The NewStandard ceased publishing on April 27, 2007.

Michelle Chen is a staff journalist.

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