While millions of working Virginians pay their state taxes on time, multi-state corporations like Wal-Mart are lobbying in Viriginia to protect an arcane loophole in the state tax laws that allows them to avoid paying their fair share in taxes. This tax dodging scheme comes as Viriginia is struggling to maintain spending on such basic needs as education for its children. Virginia Governor Tim Kaine announced this week that the state has a $1.4 billion budget shortfall through 2010, and may need to cut spending on education and layoff state workers. The Governor’s initial budget included $6 million that the Commonwealth would gain if it closed the loophole that Wal-Mart used to avoid state taxes. But the Newport News, VA. Daily Press reports this week that a bill to close the loophole has died in a legislative committee. Stated simply, under this loophole, Wal-Mart is able to charge itself rent, pay that rent to one of its own holding companies in Delaware, thus lowering its taxable income in the operating state, which lowers its tax bill. No rent actually changes hands, because the “expense” stays entirely within Wal-Mart at all times. The neighboring state of North Carolina is in a prolonged battle with Wal-Mart over the same issue of nonpayment of state taxes. Wal-Mart recently lost an appeal against North Carolina over a $33 million tax bill. The giant retailer is appealing that decision. In Massachusetts, Governor Deval Patrick and lawmakers appear to be ready to close a similar loophole there, despite $208,000 in Wal-Mart lobbying expenses in 2007 to keep the loophole open. The Daily Press quoted a Wal-Mart lobbyist, Kelly Hobbs, as saying the loophole that allows Wal-Mart to create phony expenses and reduce its taxable income, simply allows the company to transfer those savings onto its customers. Wal-Mart nationally just celebrated $100 billion in gross sales in the last quarter, so much of its “savings” appear to have passed on to the Walton family, not to state taxpayers. Hobbs told the newspaper, “We’ll do anything we can to lawfully reduce our costs and pass those savings on to our customers in the form of lower costs.” The Wal-Mart loophole was described as an “unintentional tax break,” but Wal-Mart has no intention of allowing the loophole to be closed. The loophole closure bill was sponsored by Delegate Steve Shannon, D-Vienna. It would have reaped at least $6.3 million annually in corporate taxes, according to the Virginia Tax Department, only counting the few retailers who use the strategy. “It was a bill that the government supported, so it’s a disappointment that it didn’t pass,” said a spokesman for Governor Kaine.
Wal-Mart puts its Virginia stores in a Real Estate Investment Trust, or REIT. The company currently has 70 superstores, 18 discount stores, and 15 Sam’s Clubs in Virginia, a total of 103 stores that are understating their taxable income. Wal-Mart pays rent to itself, and the money passed through a variety of corporate entities in a way that substantially reduces corporate income taxes in some states. The tax scam was devised by Ernst & Young, the retailer’s CPA firm, as a tax reducing strategy. Wal-Mart says it uses REITs to “more easily manage” its real estate, according to the Daily Press. But the tax laws allow the company to lower its tax bill, while other businesses in the state are paying their fair share. In this way, Wal-Mart gets a financial break that is not available to competitors who operate solely within Virginia. The tax loophole is only useful to companies that have corporate entities scattered in more than one state. The Virginia bill was based on recommendations from the Multistate Tax Commission, which recommends that state’s close “the captive REIT” loophole to make corporations pay their fair share. This issue was first revealed in a Wall Street Journal article last year. Sprawl-Busters recently revealed that Wal-Mart in Massachusetts had increased its lobbying expenditures 5-fold in 2007, and this tax loophole issue was one of the measures that two high-priced lobbying firms were hired to “monitor.” The Virginia legislation to close the loophole was actually supported by a trade group for REITs, which the Daily Pres said “wanted to make sure the legitimate system of REIT investment and taxation was not affected.” For earlier stories, search by “REIT.”