Save Money, Live Better: Wal-Mart’s State Tax Avoidance Schemes

State legislators across the country are facing budget shortfalls and financial crunches, and as they consider cutting back on municipal services, Wal-Mart continues to avoid paying its fair share of state taxes. Wal-Mart - the world’s largest company and one of the nation’s largest holders of private property - has come up with a number of strategies to avoid paying state property and income taxes. Wal-Mart Watch has begun an effort to raise awareness among state legislators of the retailer’s complex and often underhanded tax strategies, beginning with these two documents - Wal-Mart Watch In Depth: Wal-Mart’s Great Tax Dodge; and One Company’s Plan to - Save Money, Live Better: Wal-Mart’s State Tax Avoidance Schemes. Click to download the PDFs.

From the introduction to One Company’s Plan to – Save Money, Live Better:

Wal-Mart, using tax avoidance schemes provided to it by the accounting firm Ernst & Young, has short-changed many states out of millions of dollars of state tax money. As revealed in a February, 2007 Wall Street Journal story, Wal-Mart pays billions of dollars in rent per year, yet in many states the retail giant has been paying rent to itself and then deducting those amounts from its state taxes.

Corporate tax loopholes are having a profound effect on state revenue collections, and mounting evidence demonstrates that Wal-Mart has aggressively pursued them for many years in order to avoid paying state taxes. The tax schemes vary in complexity as well as legality from state to state, but the underlying results are the same: these strategies have saved Wal-Mart from paying hundreds of millions of dollars in state taxes.

Wal-Mart has been taking advantage of a tax loophole that the federal government closed years ago, paying rent to itself then deducting it from state taxes in about twenty-five states. Data from
filings with the Securities and Exchange Commission show that on average Wal-Mart has paid only about half the statutory state rates over the past decade. Many states have taken a proactive approach and computed Wal-Mart’s tax bills by combining the company’s tax return with those of tax-shelter subsidiaries created during the 1990s, contending that Wal-Mart’s income tax returns have failed to disclose Wal-Mart’s true earnings on its business carried on in a particular state.

The Wall Street Journal, consulting with accounting experts, used an average state tax rate of 6.5% to calculate that for a four year period from 1998 to 2001, Wal-Mart’s REIT payments saved the retailer approximately $350 million in state taxes – the loss of federal deductions that would have been triggered by larger state tax payments still left Wal-Mart with about $230 million in savings. In Wisconsin, for example, public documents show that Wal-Mart had taken home to Arkansas approximately $852 million in net profits between the years 2000 and 2003, while over that same time period, Wal-Mart had paid only $3 million in corporate income tax – far below what the state’s 7.9% corporate income tax rate would suggest the company owed, namely, about an additional $64 million.

Posted by Alex Goldschmidt on Friday, July 11, 2008

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