Wal-Mart's Whac-A-Mole Tax Game

La Dolce Vita, Walton Style

By Al Norman

Trying to beat taxes out of Wal-Mart is like banging on a Whac-A-Mole game. When you whack the mole down into its hole, another mole immediately pops out. The faster you whack with your mallet, the faster the moles pop up.

In Wal-Mart's Whac-A-Mole Tax Game, when the state goes to grab its taxes, they disappear into a loophole, and when the government tries to close the loophole, Wal-Mart just opens up another one.

This week, the state of Massachusetts thought it had Wal-Mart whacked -- but the retailer just ducked into another loophole. Governor Deval Patrick had proposed tax reform legislation that included "combined reporting," an accounting system that treats a company with many subsidiaries across many states as just one company, and taxes that company based on the percentage of its business that is in the state, as measured by where its property, payroll and sales are made. It's called closing corporate loopholes.

Realizing months ago that the Governor of Massachusetts was coming after them with a mallet, Wal-Mart hired three lobbying firms to dodge the blow. The retailer paid $208,678 in 2007 to protect its lucrative tax loophole -- five times what the company had spent the previous year on lobbying.

Under current law in states which have only "separate reporting," Wal-Mart pays rent to itself through a maze of eight corporate subsidiaries, including Real Estate Investment Trusts (REITs). The rent appears as an expense on state tax forms, and is deducted from its taxable revenues. Wal-Mart pays 2.5% of its 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 the parties. Neither the REIT nor the Property Company ever had 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, which are 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. This complex game makes it almost impossible for tax regulators to follow the money.

But this week, when the Massachusetts General Court went to close the "separate reporting" tax loophole by adopting combined reporting, Wal-Mart offered a last-minute amendment on the House floor, which was adopted with no roll call vote, and no real debate. "It was somewhat embarrassing," one Baystate lawmaker told The Boston Globe. The 2,300 word amendment allows a corporation to avoid taxes if they maintain a major portion of their business overseas.

This is the same Whac-A-Mole game being played in Illinois -- a story that was narrated by the Wall Street Journal last November. Wal-Mart opened up an office in Florence, Italy -- a country where it has no stores -- and because Illinois tax rules only apply to profits made in Illinois---Wal-Mart avoided taxes by using its office in Italy as a tax Whac-A-Mole. The retailer put all its Illinois stores under the control of its own REIT.

The stores paid "rent" to the REIT, and deducted those rent payments as an expense from its taxable income. The REIT paid its money to a Delaware subsidiary. To get around combined reporting -- which Illinois has -- Wal-Mart created yet another Delaware company called WMGS Services, with an office in Florence. WMGS is owned by Wal-Mart Property Company. Because Wal-Mart Property is just a shell, owning no stores and having no employees, Wal-Mart can claim it's a "80/20" company---that 80% of its workers and property are overseas.

When the Wall Street Journal paid the Florence Wal-Mart operation a visit, a worker there said the company had 22 employees in Florence. By appearing to be a foreign company, the Arkansas-based Wal-Mart tries to shelter its profits from taxation. La Dolce Vita -- Walton style.

The Illinois Department of Revenue Whacked Wal-Mart for $26.4 million in back taxes, and Wal-Mart then sued the state to whack it back. The Illinois director of the Department of Revenue called this loophole "highly questionable conduct." But Wal-Mart's response to The Boston Globe story about its last minute loophole was: "Anytime there's a lawful way to reduce our expenses and save money for our customers, we're aware of it." And anytime Wal-Mart can stiff the taxpayers of Massachusetts, they're on it quicker than you can say "Tuscan Sun."

Several days ago, at the opening of a Neighborhood Market in Plantation, Florida, Wal-Mart passed out a $5,000 check to the Boys and Girls Clubs of Broward County, a $2,500 check to the Plantation Park Elementary School, and several smaller donations to area charities. "We know that financial support to our local organizations makes a real difference," a Wal-Mart spokesman said, "and we will play a role in continuing Wal-Mart's commitment to the community. Like all Wal-Mart stores, our store will work with neighborhood organizations to provide support throughout the year."

Except at tax time.

Al Norman is the founder of Sprawl-Busters. Forbes Magazine called him "Wal-Mart's #1 Enemy.