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.

[MarkL]

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.

Exactly the reason I've written my congress-critters that a law should be passed (yeah, right) that outlaws withholding the taxes from paychecks. I think that employees should have to write a check to the government every month or quarter, so they would really know how much they're paying in taxes. And one due date would have to be 1 week before any election! But of course, that will never happen.

Mark

[listenhillary]

Tax laws lead to creative thinking. Walmart doesn't pay taxes, the consumer pays the taxes as taxes are built into the selling price of the product.

[MadIvan]

There is tax dodging and tax avoidance. The former is illegal, the latter perfectly legal. Walmart is doing the latter, and good on them. No one sane wants to give more money to the government.

Regards, Ivan

[Doohickey]

Gosh, maybe if Federal, State and local governments didn't view property owners as streams of income this wouldn't be a problem.

[ivyleaguebrat]

"taxes are not a cost of production, so taxes do not affect prices":

Theoretically speaking.. could only be true with perfectly inelastic demand, which doesn't really exist in most markets.. Cigarettes and gasoline, by contrast, have fairly high elasticity of demand.

Taxes do obviously affect prices. However, it's usually wrong to suggest companies will pass *all* of an ad valorem tax on to their customers.. The company absorbs some loss, the customers absorb some loss, and some surplus is lost to general reduced efficiency.. how much of each depends on market elasticities, cost structures, and the structure of the tax..