According to Wal-Mart, the giant retailer paid more than $26.2 million in state and local taxes in the state of Wisconsin in FYE 2007. Unfortunately, the state of Wisconsin does not agree with that figure, and is charging that the world’s richest retailer owes the state millions in back taxes. On April 18, 2007, Sprawl-Busters reported on research by the Citizens for Tax Justice (CTJ) which found that across the nation, Wal-Mart avoided $2.3 billion in state income taxes from 1999-2005. According to CTJ, by using an array of tax loopholes, such as Real Estate Investment Trusts (REITs), Wal-Mart paid less than half of the state income tax that would be expected. The example given was from Wisconsin, where Wal-Mart, on estimated income of $852 million from 2000 to 2003, paid only $3 million in state income tax — a tax rate of 0.35% versus the 7.9% statutory tax rate corporations are supposed to pay in Wisconsin. Wal-Mart avoids paying millions in state taxes by charging itself rent for the stores its owns, then deducting that rent, which it pays to its Delaware-based Real Estate Investment Trust (REIT), as a business expense, which then lowers its income which is taxable by the state. It’s an elaborate way of understating revenue. “In effect, Wal-Mart pays rent to itself and takes a deduction for doing so,” according to the Wisconsis Revenue Department claim. The REIT 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 says that Wal-Mart set up these subsidiaries for the sole purpose of avoiding taxes, and on that basis disallowed the deduction as illegal, and now wants Wal-Mart to pay its bills — which prompted Wal-Mart to challenge the state’s ruling. State officials in Wisconsin charge that by using this mechanism, Wal-Mart has dodged millions in tax payments by paying rent on 87 Wisconsin properties. The state Department of Revenue calls Wal-Mart’s actions an “abuse and distortion of income.” The Arkansas-based retailer now owes the taxpayers of Wisconsin $17.7 million in corporate taxes and interest just for the years 1998, 1999, and 2000, according to the Milwaukee Journal Sentinel. Figures for more recent years have not been made public. Wisconsin Revenue Department lawyers told the newspaper that becaused Wal-Mart has not been paying its fair share of taxes, it has been hurting the public schools, local police and fire departments and the highways the company uses in the process of doing business in the state. Because Wal-Mart doesn’t pay its fair share, other individual taxpayers and small businesses in the state have to assume an unfair burden. These other taxpayers, the state said, are not wealthy corporations who are able to set up “elaborate mechanisms,” to avoid paying taxes. The state’s Tax Appeals Commission is currently hearing the case.
In its defense, Wal-Mart argues that it hasn’t done anything wrong, but is just taking advantage of an “overlap” of state and federal tax laws. To reduce its taxes and expenses, it creates a subsidiary corporation to own its real estate, which is separate from the subsididary that runs its stores. The store subsididary pays rent to the real estate subsidiary and claims a tax deduction for the rent — even though the rent money never leaves the corporation. It’s a tax-avoidance scheme dreamed up by Wal-Mart financial accounting consultants. “Anything Wal-Mart can do to lawfully lower its costs allows the company to pass it along through lower prices,” a company spokesman told the Journal Sentinel. “This is a lawful (tax) structure in Wisconsin.” It can also be argued that Wal-Mart did not “pass it along” to consumers, but pocketed the difference as part of its $11.4 billion in profits last year. The Wal-Mart “tax deadbeat” story has forced some state lawmakers in Wisconsin to propose language in the state’s budget that would outlaw the “abusive” tax scheme that Wal-Mart apparently still uses to not pay taxes. State Senator Russ Decker (D-Schofield), said Wal-Mart and others who use the deduction are “scamming the system, and we ought to plug the loophole.” Senate Majority Leader Judy Robson (D-Beloit) said late last week that Wal-Mart was the “poster child” for corporations that don’t pay their fair share of taxes. Other competitive retailers in Wisconsin, like Sears and Kohl’s, told the newspaper they do not use the Wal-Mart technique, known as the “captive REIT”, to avoid state taxes. A number of other states, like Massachusetts, are considering “combined reporting” tax reform, which requires corporations to report all their revenues in one state, ending the ability to assign costs to other states and escape taxation. All related companies would have to file one income tax return. Wal-Mart is Wisconsin’s largest private employer, with 28,920 workers. If the Tax Appeals Commission comes down against Wal-Mart, the retailer is expected to take its case to court, which means Wisconsin taxpayers aren’t going to see any relief from Wal-Mart for many years to come. “It’s just a fairness issue,” one State Senator told the Journal Sentinel. “Go down on Main Street – these businesses are being economically disadvantaged to these big corporations.”
