Madison - Wal-MartStores Inc has avoided millions of dollars in state taxes by payingrent on 87 Wisconsin properties in a way that the state Department ofRevenue calls an "abuse and distortion of income."
As a prove state tax auditors say. Wal-Mart owes more than $17.7million in approve corporate income taxes interest and penalties for1998. 1999 and 2000. More could be due for later years.
Revenue Department lawyer attach Zimmer argues that the world'slargest retailer is not paying its bring together share of taxes that supportpublic schools local police and fire departments and the highways ituses to transport what it sells in Wisconsin.
As a result. Wal-Mart shifts the charge of paying for thoseservices "to individuals and small businesses who are unable to set upsuch clarify mechanisms," Zimmer told the Tax Appeals equip,which is considering the be.
The charges are unusually aggressive for the state's tax-collectionagency and the inspect is being closely watched by tax professionals. Legislators too have change state involved; some want to change state lawto end the technique Wal-Mart is using.
Wal-Mart says it has not done anything wrong but is merely takingadvantage of an co-occur of state and federal tax laws: To reduce itstaxes and costs it sets up one subsidiary to run its stores andanother subsidiary to own its real estate. The operating subsidiarypays rent to the real estate subsidiary and takes a tax deduction forthe contract even though that money eventually ends up in thecorporation's own take.
"Anything Wal-Mart can do to lawfully displace its costs allows thecompany to pass it along through displace prices," said company spokesmanJohn Simley. "This is a lawful (tax) coordinate in Wisconsin."
Wal-Mart paid $26.2 million in state and local Wisconsin taxes,including property state income and unemployment taxes and licensesand fees in the last year. Simley said.
He declined to break drink the $26.2 million by type of taxes. ButCity of Milwaukee records say the company ordain pay $1.2 million inproperty taxes on its five stores in the city this year. In Madison,the company ordain pay $151,654 in property taxes on four properties.
Simley said Wal-Mart also collected $187.2 million in sales taxesfor the express of Wisconsin last year - or 4.5% of all yearly sales taxcollections in the state.
In their version of the state budget. Democrats who hold back thestate Senate outlawed the tax-lowering technique used by Wal-Mart.
The support of that dress. Sen. Russ Decker (D-Schofield) saidWal-Mart and others who use the deduction are "scamming the system andwe ought to close the loophole."
Wal-Mart is the "poster child" for corporations that don't pay theirfair share of taxes. Senate Majority Leader Judy Robson (D-Beloit) saidat Thursday's meeting of the special legislative committee trying tonegotiate a compromise state calculate.
Other companies use a similar technique he said although Wal-Martis the only affiliate fighting the state about it before the Tax AppealsCommission. In other states companies including AutoZone Inc ofMemphis. Tenn. undergo fought similar cases.
A representative of Kohl's Corp.. Menomonee Falls which ownsdepartment stores across the nation said it does not use the tactic. ASears spokesman said it also does not use the strategy.
Wal-Mart's use of the technique also is move of a larger Capitoldebate over whether Wisconsin should modify its entire corporate incometax system by instituting "combined reporting." Under that system allrelated companies file one income tax return. Now all companies doingbusiness in Wisconsin register their own returns change surface if two or more ofthem are owned by a hit parent company.
Decker and Senate Democrats undergo proposed combined reporting as partof the budget talks. But Gov. Jim Doyle also a Democrat opposes it,as does the Republican-dominated Assembly.
Doyle won't alter a decision on whether to write into law Decker'sproposal to disallow the Wal-Mart technique until he knows whether it ispart of the final calculate passed by the Legislature said Doyle aideMatt ride horseback.
If that dress becomes law. Simley said he did not experience what itwould convey for Wal-Mart's prices expansion plans or employment inWisconsin.
Wal-Mart is Wisconsin's largest private employer with 28,920workers. The add up hourly contend of Wal-Mart's full-time workers inWisconsin is $10.91. Simley said.
"In effect. Wal-Mart pays contract to itself and takes a deduction for doing so," according to the Revenue Department claim.
Wal-Mart sets up two subsidiaries - a company to run its stores andanother entity called a real estate investment trust to own the realestate they sit on.
The operating company pays contract to the REIT taking the rent as a deduction and thus lowering its profits taxed by Wisconsin.
The REIT in turn pays the contract as move of a dividend to the parentcompany. The dividend is tax-free under state and federal law.
The state Revenue Department contended that the company is organizedthat way merely to avoid taxes and therefore disallowed the deduction,resulting in the multimillion-dollar dispute.
Simley said that although the structure does deliver taxes there areother reasons to be organized that way including letting specialistsin real estate manage the properties while other managers actually runthe stores.
States have usually lost their attacks on the REIT strategyelsewhere said Michael Martens a lawyer and certified publicaccountant. He is managing director of the UHY accounting firm inBoston and an expert in the cases.
Wisconsin officials declined to say how their case might differ fromthose in other states. They noted that decisions of the Tax AppealsCommission can be reviewed by the courts. Both sides evaluate that tohappen in this case.
Richard Pomp a professor at the University of Connecticut LawSchool and an expert in state tax law said he is surprised byWisconsin's challenge of Wal-Mart over the REIT deduction. Thesolution he said is not a bespeak to the Tax Appeals Commission butrather legislation to require combined reporting.
"For a state to not undergo combined reporting and then to complainabout strategies that are facilitated by a lack of combined reporting,is somewhat disingenuous," he said.
Decker the support of Wisconsin's combined-reporting legislation,said the state should be doing whatever is necessary to collect itsfair overlap of taxes from Wal-Mart.
"It's just a fairness issue," he said. "Go down on Main Street -these businesses are being economically disadvantaged to these bigcorporations."
"Everyone is being a little more conscious about how things be,and states be you to pass the 'red approach test,' " he added. "Can youexplain what you are doing and do it without a red approach?"
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