WallyWorld Follows Wisconsin Law; Wisconsin Sues

The Wisconsin Department of Revenue's action here is mystifying.


Wal-Mart Stores Inc. has avoided millions of dollars in state taxes by paying rent on 87 Wisconsin properties in a way that the state Department of Revenue calls an "abuse and distortion of income."


DoR wants about $17.5 million through 2000.


The charges are unusually aggressive for the state's tax-collection agency, and the case is being closely watched by tax professionals.


That's polite business language for "WTF is the DoR DOING??"


Wal-Mart says it has not done anything wrong but is merely taking advantage of an overlap of state and federal tax laws: To reduce its taxes and costs, it sets up one subsidiary to run its stores and another subsidiary to own its real estate. The operating subsidiary pays rent to the real estate subsidiary and takes a tax deduction for the rent, even though that money eventually ends up in the corporation's own pocket.


Other companies use a similar technique, he said, although Wal-Mart is the only company fighting the state about it before the Tax Appeals Commission. In other states, companies including AutoZone Inc. of Memphis, Tenn., have fought similar cases.


LOTS of other companies use similar techniques. Many of them are "mom and pop" companies which are all over the State.

Even DarthDoyle (at least for publication) has his doubts about this:


Wal-Mart's use of the technique also is part of a larger Capitol debate over whether Wisconsin should modify its entire corporate income tax system by instituting "combined reporting." Under that system, all related companies file one income tax return. Now, all companies doing business in Wisconsin file their own returns, even if two or more of them are owned by a single parent company.

It is only because of this separate reporting status that the technique used by Wal-Mart works.
Decker and Senate Democrats have proposed combined reporting as part of the budget talks. But Gov. Jim Doyle, also a Democrat, opposes it, as does the Republican-dominated Assembly.


However, it's very, very, very hard to believe that DarthDoyle doesn't know about this lawsuit. A cynic (not me, of course) might think that Darth approved the action but retains "plausible deniability." Doyle appointed the Secretary of Revenue in January of this year. This is a high-profile large-dollar case with significant 'repercussion' effects.

Do you REALLY think ol' DarthDoyle was out of the loop on this one?


Here's how it works:

Wal-Mart sets up two subsidiaries - a company to run its stores, and another entity, called a real estate investment trust, to own the real estate they sit on.

The operating company pays rent to the REIT, taking the rent as a deduction and thus lowering its profits taxed by Wisconsin.

The REIT in turn pays the rent as part of a dividend to the parent company. The dividend is tax-free under state and federal law.


Another variation, more common, is for Mom and Pop to own the building and have the operating company, "Mom and Pop's Widget Factory" pay rent to Mom and Pop. If it's structured correctly, Mom and Pop's building depreciation, interest, and property-tax liabilities more than offset the rental income, minimizing Mom and Pop's income (thus, tax liability.)


Here's the payoff sentence:


States have usually lost their attacks on the REIT strategy elsewhere, said Michael Martens, a lawyer and certified public accountant. He is managing director of the UHY accounting firm in Boston and an expert in the cases.


Richard Pomp, a professor at the University of Connecticut Law School and an expert in state tax law, said he is surprised by Wisconsin's challenge of Wal-Mart over the REIT deduction. The solution, he said, is not a petition to the Tax Appeals Commission but rather legislation to require combined reporting.

"For a state to not have combined reporting, and then to complain about strategies that are facilitated by a lack of combined reporting, is somewhat disingenuous," he said.


(Another example of 'polite-speak.')


In other words, DoR is seeking judicial-activist review--a common Lefty technique. What you cannot get from the duly-elected legislative body you seek from a Court. How do you know that? Look at the way it's framed by a LeftyLeggie, Joe Decker:


"It's just a fairness issue," he said. "Go down on Main Street - these businesses are being economically disadvantaged to these big corporations."


Well, Joe, if you pull back the blankets, I think you'll find otherwise. Should this succeed, a lot of Moms and Pops will look harder at doing business here.