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PSN on February 1, 2007 - 9:51am
In a breaking story today, the Wall Street Journal ($) reports that Wal-Mart has been setting up shell companies to purchase property through a REIT investment vehicle, then renting those buildings to Wal-Mart stores-- allowing the company to deduct the cost of the rent from state taxes in twenty-five states.
This is just part of the tax loophole strategies used by Wal-Mart that allows it to pay half of the statutory state tax rates over the last decade. The REIT strategy alone cut Wal-Mart's state taxes by $350 million, or about 20% of its tax bill, over one four-year period.
Luckily, states are working to crackdown on these kinds of loopholes that use multiple shell subsidiaries through a method called "combined reporting," which requires companies to aggregate revenue together from all its subsidaries in a state. Yesterday, New York's Gov. Eliot Spitzer announced eliminating the loophole as part of his proposed budget, a move that will save the state $83 million per year. North Carolina tax authorities are also challenging the Wal-Mart REIT strategy, ordering the companry in 2005 to pay $33 million in back taxes, interest and penalties.
Wal-Mart's scam is just part of a larger array of tax loopholes used by corporations to rip off taxpayers, so states definitely need to step in with tools like combined reporting to reduce the tax avoidance games.