You saw a discussion on the need for Combined Reporting here on the 22nd ("Property Taxes: 'Why am I paying so much?' Part 2"). Now see it in the "mainstream."
What Wal-Mart doesn't pay, you do.
From Sunday's Milwaukee Journal Sentinel:
Wal-Mart owes back taxes, state says
Paying rent to itself cuts millions off retailer's tax bill
By STEVEN WALTERS and AVRUM D. LANK
[email protected]Posted: Aug. 25, 2007
Madison - Wal-Mart Stores Inc. has avoided millions of dollars in state taxes by paying rent on 87 Wisconsin properties in a way that the state Department of Revenue calls an "abuse and distortion of income."
As a result, state tax auditors say, Wal-Mart owes more than $17.7 million in back corporate income taxes, interest and penalties for 1998, 1999 and 2000. More could be due for later years.
Revenue Department lawyer Mark Zimmer argues that the world's largest retailer is not paying its fair share of taxes that support public schools, local police and fire departments and the highways it uses to transport what it sells in Wisconsin.
As a result, Wal-Mart shifts the burden of paying for those services "to individuals and small businesses who are unable to set up such elaborate mechanisms," Zimmer told the Tax Appeals Commission, which is considering the matter.
The charges are unusually aggressive for the state's tax-collection agency, and the case is being closely watched by tax professionals. Legislators, too, have become involved; some want to change state law to end the technique Wal-Mart is using.
Wal-Mart says it has not done anything wrong but is merely taking advantage of an overlap of state and federal tax laws: To reduce its taxes and costs, it sets up one subsidiary to run its stores and another subsidiary to own its real estate. The operating subsidiary pays rent to the real estate subsidiary and takes a tax deduction for the rent, even though that money eventually ends up in the corporation's own pocket.
"Anything Wal-Mart can do to lawfully lower its costs allows the company to pass it along through lower prices," said company spokesman John Simley. "This is a lawful (tax) structure in Wisconsin."
Wal-Mart paid $26.2 million in state and local Wisconsin taxes, including property, state income and unemployment taxes and licenses and fees, in the last year, Simley said.
He declined to break down the $26.2 million by type of taxes. But City of Milwaukee records say the company will pay $1.2 million in property taxes on its five stores in the city this year. In Madison, the company will pay $151,654 in property taxes on four properties.
Simley said Wal-Mart also collected $187.2 million in sales taxes for the State of Wisconsin last year - or 4.5% of all yearly sales tax collections in the state.
Caught up in the budget
The Tax Appeals Commission case is part of the Capitol impasse over the next state budget.
In their version of the state budget, Democrats who control the state Senate outlawed the tax-lowering technique used by Wal-Mart.
The sponsor of that change, Sen. Russ Decker (D-Schofield), said Wal-Mart and others who use the deduction are "scamming the system, and we ought to plug the loophole."
Wal-Mart is the "poster child" for corporations that don't pay their fair share of taxes, Senate Majority Leader Judy Robson (D-Beloit) said at Thursday's meeting of the special legislative committee trying to negotiate a compromise state budget.
"There are many taxes that we pay in Wisconsin," Simley said.
Other companies use a similar technique, he said, although Wal-Mart is the only company fighting the state about it before the Tax Appeals Commission. In other states, companies including AutoZone Inc. of Memphis, Tenn., have fought similar cases.
A representative of Kohl's Corp., Menomonee Falls, which owns department stores across the nation, said it does not use the tactic. A Sears spokesman said it also does not use the strategy.
Wal-Mart's use of the technique also is part of a larger Capitol debate over whether Wisconsin should modify its entire corporate income tax system by instituting "combined reporting." Under that system, all related companies file one income tax return. Now, all companies doing business in Wisconsin file their own returns, even if two or more of them are owned by a single parent company.
It is only because of this separate reporting status that the technique used by Wal-Mart works.
Decker and Senate Democrats have proposed combined reporting as part of the budget talks. But Gov. Jim Doyle, also a Democrat, opposes it, as does the Republican-dominated Assembly.
Doyle won't make a decision on whether to sign into law Decker's proposal to outlaw the Wal-Mart technique until he knows whether it is part of the final budget passed by the Legislature, said Doyle aide Matt Canter.
If that change becomes law, Simley said he did not know what it would mean for Wal-Mart's prices, expansion plans or employment in Wisconsin.
Wal-Mart is Wisconsin's largest private employer, with 28,920 workers. The average hourly wage of Wal-Mart's full-time workers in Wisconsin is $10.91, Simley said.
How it works
Many states are trying to crack down on the technique used by Wal-Mart, commonly called a "captive REIT," or real estate investment trust.
"In effect, Wal-Mart pays rent to itself and takes a deduction for doing so," according to the Revenue Department claim.
Here's how it works:
Wal-Mart sets up two subsidiaries - a company to run its stores, and another entity, called a real estate investment trust, to own the real estate they sit on.
The operating company pays rent to the REIT, taking the rent as a deduction and thus lowering its profits taxed by Wisconsin.
The REIT in turn 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 contended that the company is organized that way merely to avoid taxes and therefore disallowed the deduction, resulting in the multimillion-dollar dispute.
Simley said that although the structure does save taxes, there are other reasons to be organized that way, including letting specialists in real estate manage the properties while other managers actually run the stores.
States have usually lost their attacks on the REIT strategy elsewhere, said Michael Martens, a lawyer and certified public accountant. He is managing director of the UHY accounting firm in Boston and an expert in the cases.
Wisconsin officials declined to say how their case might differ from those in other states. They noted that decisions of the Tax Appeals Commission can be reviewed by the courts. Both sides expect that to happen in this case.
Richard Pomp, a professor at the University of Connecticut Law School and an expert in state tax law, said he is surprised by Wisconsin's challenge of Wal-Mart over the REIT deduction. The solution, he said, is not a petition to the Tax Appeals Commission but rather legislation to require combined reporting.
"For a state to not have combined reporting, and then to complain about strategies that are facilitated by a lack of combined reporting, is somewhat disingenuous," he said.
Decker, the sponsor of Wisconsin's combined-reporting legislation, said the state should be doing whatever is necessary to collect its fair share of taxes from Wal-Mart.
"It's just a fairness issue," he said. "Go down on Main Street - these businesses are being economically disadvantaged to these big corporations."
Martens said the increasing number of challenges to captive REITs is a sign of the times.
"Everyone is being a little more conscious about how things appear, and states want you to pass the 'red face test,' " he added. "Can you explain what you are doing and do it without a red face?"
Comments