Low taxes, always | Arkansas Blog

Thursday, February 1, 2007

Low taxes, always

Posted By on Thu, Feb 1, 2007 at 11:41 AM

Here's an abstract of a Wall Street Journal article about Wal-Mart's business practices. Don't you wish you could deduct rent you paid yourself?

Wal-Mart, the nation's largest employer and the world's biggest retailer, is regularly paying itself rent and using the transaction to decrease the taxes it pays to state governments, according to a report in this morning's Wall Street Journal.

The article by Jesse Drucker shows that Wal-Mart has saved hundreds of millions of dollars in taxes in 25 states, and may not be the only company using the practice. Drucker shows that state governments are finally getting wise and working to close a complicated tax loophole that the federal government discontinued years ago.

Wal-Mart is using a tax loophole involving "real-estate investment trusts" to call "rent" it pays to itself a tax-deductible business expense, Drucker explains. A Wal-Mart subsidary will pay rent to a real-estate investment trust, which is owned by another Wal-Mart subsidiary. The trust hands the rent to the second subsidiary in the form of a dividend, which cannot be taxed. Additionally, Wal-Mart counts the initial rental payment as a business expense, which is deducted from taxes in the state where the store is located. In one four-year period, Wal-Mart avoided $350 million in taxes using this strategy, which was developed by the accounting firm Ernst & Young LLP.

The loophole is getting attention in state governments. Newly installed New York Governor Elliot Spitzer said he would close the loophole in the hopes of adding $83 million to New York's state budget, and North Carolina is suing Wal-Mart for back taxes. Smaller companies using the same loophole, like Autozone and Fleet Funding, are also receiving more scrutiny.

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