Just read this morning's Wall Street Journal article Wal-Mart Cuts Taxes by Paying Rent to Itself, which is about WalMart's use of Real Estate Investment Trusts (REIT) to reduce its state taxes including those due right here in the Old North State. (If you can get to the online version, there are some documents relating to the Wal-Mart case in NC.) The article leaves you with the distinct impression that Wal-Mart isn't the only company in North Carolina doing this kind of thing with REITs.
Here's a couple of excerpts from the story:
The arrangement takes advantage of a tax loophole that the federal government plugged decades ago, but which many states have been slower to catch. Here's how it works: One Wal-Mart subsidiary pays the rent to a real-estate investment trust, or REIT, which is entitled to a tax break if it pays its profits out in dividends. The REIT is 99%-owned by another Wal-Mart subsidiary, which receives the REIT's dividends tax-free. And Wal-Mart gets to deduct the rent from state taxes as a business expense, even though the money has stayed within the company.
In NC, Wal-Mart paid up, but now is suing the state to get the money back.
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 state calls captive REITs a "high priority corporate tax sheltering issue" and in 2005 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.
Some of the stuff in the documents is pretty amazing--even for Wal-Mart.
Underscoring that the rental payments were cashless Wal-Mart accounting moves, an affidavit filed in North Carolina by the company's former controller, James A. Walker Jr., states that the payments were made by simply debiting the account of one subsidiary and then crediting the account of the other. "Wal-Mart Stores, Inc. served, in effect, as a bank for" both sides, the affidavit stated.