Corporate Taxes too high??

The one trick pony that is the Republican Party, whose only solution to anything is tax cuts, have been whining about how our corporate tax rates are too high. Yet there are plenty of loopholes that corporations use to get out of paying their fair share. Al Norman reports on the Huffington Post about one that Wal-Mart was using and has lost in North Carolina.

Two years ago, the Wall Street Journal ran a story revealing that Wal-Mart pays billions of dollars a year in rent for its stores, but in 25 states—most of them east of the Mississippi—it has been paying most of that rent to itself, and deducting that amount from its state taxes. This scheme has allowed Wal-Mart to avoid paying several hundred million dollars in state taxes.

Based on a dodge developed by its accounting firm, Ernst & Young, as a “local tax reduction strategy,” Wal-Mart’s financial self-dealing has allowed it to pay rent to itself through a maze of eight corporate subsidiaries created in 1996, including Real Estate Investment Trusts (REITs).

Under the agreement with itself, Wal-Mart pays 2.5% of gross sales monthly as rent to its own REIT, which then wires the money quarterly to Wal-Mart Property Company in the form of a dividend, which is then paid to Wal-Mart Stores as a tax-exempt “dividends received.” All of these transactions are handled through a “cash management agreement” between all the parties. Neither the REIT nor the Property Company has any employees.

The REITs don’t pay taxes, as long as they pay 90% of their income out in dividends to shareholders. In Wal-Mart’s case, the REITs are owned by Wal-Mart subsidiaries registered in Delaware, a state that has no corporate income tax. Wal-Mart gets the benefit of the rent expense, but also gets the benefit of the non-taxed dividend, on the same monies. The dividends escape taxation, and the original rent that created the dividends is deducted from taxable income in the states where the “expense” is incurred. The rent, in essence, goes from one Wal-Mart pocket, into another.

Now if you were a person against paying your income or payroll taxes, wouldn’t it be sweet to be able to set up an automatic system to shuffle money to reduce your tax liability.  Of course, I think taxes provide useful services, so I wouldn’t do that, but maybe some of you readers would like to do that.

When North Carolina challenged this financial shenanigans, and required Wal-Mart to consolidate its financial earnings, Wal-Mart paid then sued.

On December 31, 2007 an Emergency Special Judge in Wade County, North Carolina Superior Court, ruled in favor of the state of North Carolina, and against Wal-Mart’s lawsuit. The Judge ruled that North Carolina had the statutory right to force a corporation to state its “true net income” through a consolidated statement, ” so as to properly reflect the extent of the corporation’s activities in the state.” The judge ruled that Wal-Mart’s treatment of rent had no “real economic substance,” and was only a mechanism for reducing the taxes it pays to the state of North Carolina. “Plaintiffs do not deny the facts demonstrating the circular journey taken by the ‘rents’ paid by these plaintiffs,” the judge wrote, “but contend that on each leg of the journey plaintiffs were only taking advantage of a lawful deduction afforded them by then-existing tax law. Such a piecemeal approach exalts form over substance, however…There is no evidence that the rent transaction, taken as a whole, has any real economic substance apart from its beneficial effect on plaintiffs’ North Carolina tax liability. It is particularly difficult for the court to conclude that rents were actually ‘paid,’ when they are subsequently returned to the payor corporation.”

That really is the sum of it, can you truly get a tax deduction for paying rent, when that money is returned to you, in effect, not paying rent?  Fortunately for North Carolina tax payers, the Wade County judge saw through the bullshit of this tax evader (and Court of Appeals upheld it).

-Josh

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