Slowly but surely, states are beginning to realize that corporate income tax can do a lot more good for their citizens if its actually remaining in the state, and not being funnelled through some loophole or tax-avoidance scheme. Montana is the next on the list to attack the problem, after state Sen. Ron Erickson introduced Senate Bill 36 yesterday, which “is aimed at stopping efforts by large corporations that have found complex ways by setting up foreign offices to avoid or lower the amount of taxes they pay in this country.”

How did this legislation come about? Why, Wal-Mart, of course. In fact, Erickson passed out copies of a 2007 Wall Street Journal article to the Senate Taxation Committee, an article that detailed how Wal-Mart had opened an office in Florence, Italy, specifically for the purpose of evading taxes. According to the Journal, Wal-Mart’s office in Italy was its only operating unit of a real estate subsidiary that controls billions of dollars of its property in U.S. states and was able to avoid U.S. taxes.

Erickson said he shops at a market in Missoula on southwest Higgins Avenue owned by a man named Jim Edwards, whose store competes against Wal-Mart. “Jim Edwards does not have a back pocket in Florence, Italy,” Erickson said. “If we want to be fair to the Jim Edwardses of Missoula, we have to make sure everyone’s paying their fair share.”

We’ve documented Wal-Mart’s state tax avoidance attempts before, and closing the loophole in Montana appears would save the state about $2.5 million per year. It doesn’t sound like a huge sum, but then again Montana’s budget isn’t going to compare to California or Illinois or New York anyway. As the Wall Street Journal noted then:

The Illinois Department of Revenue objected to the Italian tax maneuver, demanding $26.4 million in back taxes, interest and penalties. Wal-Mart paid the amount in dispute and then sued the state for a refund, according to a complaint filed in May in Illinois Circuit Court in Springfield.

The Illinois case is ongoing.

Missoula senator seeks to raise corporate taxes by closing loopholes [Missoulian]

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The collection is from an undisclosed company - unnamed because of state tax confidentiality laws.

The REIT loophole issue, which focuses on the use of captive real estate investment trusts to avoid paying state corporate income taxes, has been in the national spotlight for going on two years now. In North Carolina, Wal-Mart saved millions of dollars in state tax bills by essentially transferring its properties to its own REIT and paying rent to itself, then writing it off as a tax deduction. These transactions were frequently followed by rather suspicious looking characters in black masks trudging back to Bentonville with big old gobs of money that could have gone to funding state programs.

North Carolina got wise to the scheme and assessed Wal-Mart for back taxes. Additional states have sought ways to close the loophole up, either through attacking it directly or by adopting combined reporting. Maryland is one of those states - last year Maryland Comptroller Peter Franchot announced that his state would no longer allow payments to captive REITs to be deducted from state tax returns. Now following its first publicized audit since then, Maryland will receive $10.8 million in back taxes for a 3-year period from the unnamed company.

We’ve chronicled again and again that Wal-Mart is one of the worst offenders in this area. Simply closing the loophole is one way to fix it. Adopting combined reporting is another. At least in Maryland’s case, the effort has already resulted in nearly $11 million coming back into the state treasury.

Maryland collects millions after closing tax loophole [Washington Post]

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