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.
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 â€“ calculated at about 6 percent of profits nationwide â€“ 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 CTJâ€™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-Martâ€™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-Martâ€™s revenues in the state, while the standard state-tax rate was nearly 8 percent. CTJ argues that Wal-Martâ€™s ability to escape 96 percent of the taxes it would ordinarily have had to pay is tied to Wisconsinâ€™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 donâ€™t disguise big corporationsâ€™ real profits."