By Elaine Mejia
Recently, a North Carolina judge ruled against Wal-Mart in the giant retailerâ€™s lawsuit against the state of North Carolina. In 2005, the state sent Wal-Mart a bill claiming that the retailer owed $33.5 million in back taxes. Wal-Mart paid up (probably to avoid heavy interest penalties later on) but then sued in state court in 2006 to have the money returned.
At issue is a clever tax scheme that the company used to avoid paying an estimated $230 million in statesâ€™ taxes across the country, according to the Wall Street Journal. North Carolinaâ€™s share of that was $33.5 million between 1998 and 2002. So what did Wal-Mart due to earn the stateâ€™s scrutiny? Essentially, the company put ownership of its properties into a â€œreal estate investment trust.â€ That trust was owned by Wal-Mart Property Co., a separate holding company. Conveniently, Wal-Mart owned 99 percent of this holding company. It used this complicated set-up to avoid state taxes by making rent payments on its stores to the holding company and then deducting that amount from its tax bills.
Unfortunately for Wal-Mart, the Department of Revenue didnâ€™t buy it and neither did the judge. In fact, the judge found that the scheme served no legitimate business purpose and was used solely to lower the companyâ€™s tax bills.
Whatâ€™s lost in most of the media coverage about this case is why it really matters and what can be done to prevent these kinds of corporate tax shenanigans in the future.
So, why should North Carolinians care about this case? If nothing else, we should care because $33.5 million dollars is at stake. But there are much bigger reasons to care. In North Carolina today, much of our quality of life depends upon healthy public structures â€” things like an educated workforce, the court system and good roads. Itâ€™s these investments that enable companies like Wal-Mart to profit from doing business in our state. When companies like Wal-Mart donâ€™t pay their fair share, two things happen â€” we forego investments that would improve our quality of life and make our economy stronger and the rest of us pay more. Iâ€™d call that a â€œlose-loseâ€ scenario.
There is a change we can make to our state tax laws that would prevent corporations from trying many of these types of tax schemes in the future. Itâ€™s called â€œcombined reporting.â€
Under this system, multi-state corporations would have to file a report with the state that discloses their entire business structure, including related entities. This would include relationships with holding companies like the one Wal-Mart owned 99 percent of and paid its rent to. Over time, using this strategy to close corporate loopholes would raise hundreds of millions of dollars that could be used for investments in things like education and roads or put back into the hands of working families by expanding the state earned income tax credit.
Twenty-two states already have combined reporting and five states have adopted this reform in just the last three years. In North Carolina, not one but two bipartisan study committees recently recommended that our state adopt this strategy as well. In the end, this really isnâ€™t about one company. Itâ€™s a wake-up call that should prompt us to put into place public policies that are fair to everyone and that will improve our lives and strengthen our economy in the decades ahead.
Elaine Mejia is director of the N.C. Budget and Tax Center.