A change in Wal-Mart’s corporate tax status in Massachusetts has triggered a volley of angry reactions from local officials across the state. The town reaction was brought to light recently in several media stories in Pittsfield, Oxford, and other municipalities.
Wal-Mart currently has 49 stores in Massachusetts, including 12 superstores, 35 discount stores, and two Sam’s clubs. Some of these stores had been classified as “Limited Partnerships.” The entity of record in a number of cities and towns was “Wal-Mart Stores East, LP.”
But in 2009, a new state law went into effect which included two provisions to close corporate loopholes. One provision, called “combined reporting,” is an accounting system that treats a company with many subsidiaries across many states as just one company, and taxes that company based on the percentage of its business that is in the state, as measured by where its property, payroll and sales are made.
As Sprawl-Busters explained in a story on April 24, 2008, Wal-Mart hired three lobbying firms to fight combined reporting. The retailer paid $208,678 in 2007 to protect its lucrative tax loophole — five times what the company had spent the previous year on lobbying. In states which have only “separate reporting,” Wal-Mart pays rent to itself through a maze of corporate subsidiaries created in November of 1996, including Real Estate Investment Trusts (REITs). The rent appears as an expense on state tax forms, and is deducted from its taxable revenues. Wal-Mart pays 2.5% of its gross sales monthly as rent to its own REIT, which then wires the money quarterly to a Wal-Mart Property Company in the form of a dividend, which is then paid to Wal-Mart Stores as a tax-exempt “dividends received.”
All of these transactions are handled through a “cash management agreement” between the parties. Neither the REIT nor the Property Company ever had any employees. The REITs don’t pay taxes, as long as they pay 90% of their income out in dividends to shareholders. In Wal-Mart’s case, the REITs are owned by Wal-Mart subsidiaries, which are registered in Delaware, a state that has no corporate income tax. Wal-Mart gets the benefit of the rent expense, but also gets the benefit of the non-taxed dividend, on the same monies. The dividends escape taxation, and the original rent that created the dividends is deducted from taxable income in the states where the “expense” is incurred.This complex game makes it almost impossible for tax regulators to follow the money.
The second provision of the 2008 Massachusetts law, called “check the box,” requires that businesses must declare themselves as the same classification at the state level as the claim at the federal level. Because Wal-Mart is classified as a corporation at the federal level, it had to reclassify all its Massachusetts stores as corporations also, not as Partnerships. Sprawl-Buster estimated that in 2006, Wal-Mart used these tax dodges to avoid $5.4 million in state taxes. A Wal-Mart spokesman told the Boston Globe, “Anytime there’s a lawful way to reduce our expenses and save money for our customers, we’re aware of it.”
It is not clear how many of Wal-Mart’s stores in Massachusetts were still listed as Limited Partnerships, but Pittsfield, Oxford, Leicester and Ware all have complained to the media that their local revenues had been raided. A Wal-Mart spokesman told the Worcester Telegram-Gazette that the loss of local revenue was the state’s fault: “Wal-Mart is based in Arkansas, is incorporated in Delaware and files taxes as a corporation in Massachusetts. That’s been the case for years. A recently enacted state law adopted federal income tax rules that classify how Wal-Mart and other companies are taxed. As a result, the law treats Wal-Mart as a Massachusetts company for tax purposes.”
A spokesman for the Massachusetts Department of Revenue countered that as of January, 2009, Wal-Mart had to declare its stores as either Limited Partnerships or Corporations. By choosing corporations, Wal-Mart lowered its personal property taxes at many stores, because the state excise tax on corporate personal property is much lower than the local personal property tax levied by cities and towns.
DOR told Sprawl-Busters that the municipal personal property tax rate ranges from $12 to $30 per $1,000 valuation, compared to the state excise tax on personal property at only $2.60 per $1,000 valuation in state excise taxes. In Oxford, Leicester and Ware, Wal-Mart paid a total of $277,548 in personal property taxes last year. Most of that sum is no longer taxable.
When the city council in Pittsfield, Massachusetts learned recently that the city was losing $187,000 in personal property taxes due to Wal-Mart’s corporate status change, one city councilor stated: “I think that big box stores, and the benefit for Pittsfield, is negligible,” Krol sai
Wal-Mart claims on its website that it pays $35.5 million in state and local taxes in Massachusetts. There is no way to independently verify this figure, because the amount that Wal-Mart pays to the state as a corporation is private information. There is no way to compare the impact of the combined reporting law on Wal-Mart’s total tax bill — but it is clear that the shift from Partnership stores to Corporations will cost local communities hundreds of thousands of dollars in losr tax revenues.
This frustration drove local officials in the tiny town of Oxford, Massachusetts to vote unanimously this month to ask their state legislators to consider changing the tax code so that towns could benefit from personal property taxes. Such a change is not likely to happen, given the corporate lobby that would oppose it.
For the forseeable future, Wal-Mart stores in many Massachusetts communities have become much less attractive financially than some local officials had hoped.
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A change in Wal-Mart???s corporate tax status in Massachusetts has triggered a volley of angry reactions from local officials across the state. The town reaction was brought to light recently in several media stories in Pittsfield, Oxford, and other municipalities.