Image above from the Center on Budget and Policy Priorities

When Wal-Mart’s use of an intricate web of subsidiaries to avoid state taxes was discovered, the N.C. Secretary of Revenue famously sent tax lawyers and auditors after the world’s biggest retailer. With state economies strapped for cash, North Carolina is now looking to halt such shenanigans before they can start.

A proposed “combined-reporting” law would require companies with multiple subsidiaries operating in several states to file tax returns as a single business. Opponents of this legislation have given lawmakers the shivers...But in the face of the state’s biggest budget crisis since the Great Depression, combined reporting took a first step Tuesday toward becoming law. After a contentious House Finance Committee meeting, the Democrat-led committee voted along party lines to approve a larger tax package that includes combined reporting.

Combined reporting basically treats a parent company and its subsidiaries as one entity for tax purposes. A driving force behind the move was the public realization of just how much money North Carolina has been losing through loopholes in its tax laws.

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• NC appeals court upholds tax bill for Wal-Mart [Associated Press]
  The state Court of Appeals ruled Tuesday against Wal-Mart Stores Inc. and its efforts to get a $33 million tax refund, upholding a trial judge's ruling that found a complex corporate structure was used primarily to avoid corporate income taxes.
  

• Wal-Mart loses appeal to get $30M in North Carolina tax refunds [Triangle Business Journal (N.C.)]
  The North Carolina Court of Appeals has denied Wal-Mart’s attempt to win $30 million in tax refunds from the state of North Carolina.
  

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To sum up: Wal-Mart cheated on its taxes, got caught, appealed its fines, lost the appeal, appealed THAT loss, and now has been told to go home again. Wal-Mart’s tax avoidance case in North Carolina, the breakthrough case that spawned a huge Wall Street Journal series, caused several state governments to re-examine their tax laws, and made REIT a household name, has taken another turn against the retail giant as the North Carolina Court of Appeals has ruled against them again:

“The Secretary acted within his lawful authority when he assessed additional taxes against plaintiff as a result of the combination of plaintiff with two related entities,” wrote NC Court of Appeals Judge Donna Stroud in her opinion.

Earlier this year, at the trial court level, Judge Clarence Horton ruled against Wal-Mart in its case filed back in 2006. Wal-Mart was seeking a refund of the over $30 million it was assessed by the North Carolina Department of Revenue for its use of a “captive REIT” tax strategy. In denying Wal-Mart’s claims then, Horton wrote:

“[Wal-Mart does] not deny the facts demonstrating the circular journey taken by the ‘rents’ paid by these plaintiffs, but contend[s] that on each leg of the journey [Wal-Mart was] only taking advantage of a lawful deduction afforded them by then-existing tax law. Such a piecemeal approach exalts form over substance, however …”

That’s twice now - at the trial court level and in the appeals court - that Wal-Mart’s attempt to recoup its tax money has been denied. You can find more background on the REIT strategy on our blog here, or in our tax report here (which also lays out several other tax avoidance schemes used by the company).

Wal-Mart loses appeal to get $30M in North Carolina tax refunds [Triangle Business Journal]

Colorado’s state legislature has decided that it really, REALLY doesn’t want Wal-Mart to even remotely have the opportunity to use a certain state corporate income tax avoidance scheme. The scheme in question is the now oft-talked about captive REIT, or captive real estate investment trust. If captive REIT sounds familiar, that would of course be because the Wall Street Journal broke the news in early 2007 that Wal-Mart was in effect paying rent to itself on its own store properties, and then deducting that rent from its state income taxes. For more of our own coverage, you can check this out. It should be noted that Wal-Mart lost the original lawsuit in North Carolina that sparked debate on the whole REIT issues earlier this month.

Anywho, back to Colorado - our beautiful 38th state and birthplace of the mouth-watering rocky mountain oyster phenomenon. Yesterday, the Colorado House Finance Committee supported a bill that would prevent businesses from taking advantage of the REIT scheme. Rep. Claire Levy, D-Boulder, introduced the legislation, citing the previously mentioned WSJ piece to drive home why the bill was necessary.

What has Levy so upset is that even though the money stayed within the corporation, Colorado could potentially lose millions of dollars in tax revenue. While Levy has been unable to yet find examples of the practice taking place in Colorado, she said House Bill 1093 protects the state from lost revenues if a business were to implement the strategy.

You know what else would help keep businesses from using tax schemes like this? Becoming a state that uses combined reporting, which essentially treats a parent company and its subsidiaries as one company for state income tax purposes. Why did Rep. Levy choose to push this legislation instead of combined reporting? Well, you see, because Colorado already is a combined reporting state. Better to be safe than sorry is as good a saying as any to follow, however, and from glancing over Colorado’s combined reporting requirements, it would appear that filing a combined report wouldn’t necessarily be mandatory. So cheers to Colorado for covering all the bases...if only all statehouses were so thorough.

Closing tax loopholes [Denver Daily News]

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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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