Wal-Mart Cuts Taxes By Paying Rent to Itself

Wall Street Journal ^ | February 1, 2007 | JESSE DRUCKER

[MinorityRepublican]

As the world's biggest retailer, Wal-Mart Stores Inc. pays billions of dollars a year in rent for its stores. Luckily for Wal-Mart, in about 25 states it has been paying most of that rent to itself -- and then deducting that amount from its state taxes.

The strategy is complex, but the bottom line is simple: It has saved Wal-Mart from paying several hundred million dollars in taxes, according to court records and a person familiar with the matter. And Wal-Mart is far from alone.

The arrangement takes advantage of a tax loophole that the federal government plugged decades ago, but which many states have been slower to catch. Here's how it works: One Wal-Mart subsidiary pays the rent to a real-estate investment trust, or REIT, which is entitled to a tax break if it pays its profits out in dividends. The REIT is 99%-owned by another Wal-Mart subsidiary, which receives the REIT's dividends tax-free. Wal-Mart gets to deduct the rent from state taxes as business expense, even though the money has stayed within the company.

Partly thanks to sophisticated financial strategies like these, states' tax collections from companies have been plummeting. On average, Wal-Mart has paid only about half of the statutory state tax rates for the past decade, according to Standard & Poor's Compustat, which collects data from SEC filings. The so-called "captive REIT" strategy alone cut Wal-Mart's state taxes by about 20% over one four-year period. Now several state regulators are trying to crack down on the strategy, used largely by retailers and banks, and some other states have changed their laws to try to end the practice. Yesterday, New York Gov. Eliot Spitzer included elimination of the loophole as part of his proposed budget, a fix he said would bring the state $83 million a year.

[discostu]

Actually it doesn't even have to be headquarters, the way Delaware's laws work you need almost nothing there to incorporate there. If you're going to start a small business and want venture capital that's the place to do your incorporation. Most angel and mezzanine level VCs know the laws of their state and the laws in Delaware, so if you want investment money from outside your state incorporate in Delaware so their laws apply.

[Lurking in Kansas]

Imagine using legal means to minimize tax burden.

I wonder how much their accountants / tax attorneys get paid? I'm sure that is done in-house and THEY don't get paid minimum wage. LOL.

[Kevmo]

Bump for later reading

[kylaka]

Yesterday, New York Gov. Eliot Spitzer included elimination of the loophole as part of his proposed budget, a fix he said would bring the state $83 million a year.

The question is, who do you trust to spend the $83 million wisely, and get the biggest bang for each buck ? One will use it to attract more customers. The other will use it to attract more votes.

[D-fendr]

It is legal and stated clearly in law that we can use whatever legal means available to minimize our taxes.

I imagine you do this too, yes?

For a business, not to do so is incompetence.

[Gabz]

If any other store was named in the headline this would be a non-story - so therefore the focus is on WALMART!!!!!!!!

[Centurion2000]

What a scam. This is nothing more than bold-face theft.

Taxes usually are, or are you talking about the avoidance of that tax?

[MrsEmmaPeel]

Hospital Administrator: Ah, I see you have the machine that goes ping. This is my favorite. You see we lease it back from the company we sold it to and that way it comes under the monthly current budget and not the capital account.

[Chode]

kinda like when tedturner sells advertizing for tmc on tnt and visaversa, nbc and msnbc, etc... they can charge what ever rate that is most advantageous to the parent company to take advantage of and write off.

[BurbankKarl]

a scam...how many companies have you heard of that sold their buildings, then leased them back?

a lot of them have been doing this.

[Gabz]

I sure hope you left off the sarcasm tag.

[Wuli]

The states that close this "loophole" will simply cost the Walmart customers in their state more money.

Of course that's what those who want to close this loophole want to do - take more money out of the producers in the economy and turn it over to the government(taxpayer)-dependent institutions.

[MinnesotaLibertarian]

My thoughts almost exactly. I understand completely why Wal-Mart is doing what they're doing. But, that tax burden is going to be shifted somwhere, so for those of us who don't shop at Wal-Mart, we stand to lose a bit, though it's probably fairly negligable. I personally think we should just get rid of all corporate taxes - that way all consumer can save (though they'll end up paying taxes elsewhere to make up for it). Still, it will be more equal.

[AFreeBird]

This is just another example why our state and federal tax laws need to be completely scrapped and rewritten.

I agree it is smart for Walmart to take advantage of the laws, but this illustrates why a simpler tax system needs to be set up. The states affected will just close that loophole by adding even more complexity into an already broken system.

[festus]

You sarcasm tag fell off.

[CSM]

"By avoiding the tax, Walmart effectively shifts the tax burden away from its customers to society as a whole."

The more members of society that carry the tax burden the more fiscally conservative that society will become. If the tax can be hidden from the citizenry in prices, then the citizenry thinks socialist programs are free. I prefer to hit the citizens over the head with the cost of their whims.

[CSM]

"What Walmart has really done is redistributed wealth by shifting the tax burden from Walmart Customers to the larger pool of taxpayers,.."

Your definition of redistribution of wealth is reversed. It is the government that tries to put the burden on as narrow a scope as possible, while they buy the votes of the non tax payers.

[MarkL]

What a scam. This is nothing more than bold-face theft.

Not at all. Theft is illegal. They're following the tax laws that were set up by politicians, probably as a favor to a donor. Do you take all the deductions that you're entitled to on your federal and state taxes?

"Theft" means that they're stealing from someone. Who exactly are they stealing from?

Mark

[MarkL]

Nice theory, but it only works if the government decides to reduce spending by the amount in taxes that Walmart is able to avoid. In reality, the government will collect the money from someone else, and that someone else is usually people like you and me who can't afford an army of accountants and tax lawyers to exploit every loophole. I don't blame Walmart because its only obligation is to maximize profits for its shareholders, but please don't try to convince me that this is a victimless tax avoidance scheme.

It's been my experience that the government will never actually "cut" spending, rather, if we're very lucky, they might cut the rate of growth of that spending. The amount of money spent by the government doesn't really seem to be influenced by the actual amount of money taken in. The politicians live in some alternate financial universe where, should you or I try to live as the government does, we'd be bankrupt, or in jail.

Mark

[MarkL]

There's even one who chooses to assert that "taxes are not a cost of production, so taxes do not affect prices"

I'd suggest that this person go buy a pack of cigarettes, or a gallon of gasoline.

Mark