The Wall Street Journal reports that Wal-Mart Stores, Inc. has used a complicated property-ownership scheme to duck taxes in 25 states, including North Carolina. A story in the Feb. 1 issue of the Journal says that “North Carolina tax authorities are challenging Wal-Mart, saying its REIT strategy was intended to ‘distort [the company’s] true net income,’ according to its filings in the case in Superior Court in Raleigh, N.C.”
The scheme involves placing ownership of store property in a Real Estate Investment Trust, with 99 percent ownership of the trust held by the parent corporation. The company-owned store pays rent to the REIT and the rent is a deductible business expense. Under state law, a REIT doesn’t pay any income tax if it distributes its profits as dividends and those dividends are delivered tax-free to shareholders. So the company gets tax-free income while reducing its taxable income for the store.
The Journal reports that in 2005 the state “ordered Wal-Mart to pay $33 million for back taxes, interest and penalties stemming from the REIT. The company paid it and last year sued the state for a refund.”
Wal-Mart has disputed the charges and defends its round-about rental plan as good business.
— Cecil Bothwell, staff writer