Wal-Mart dodging state taxes?

Wal-Mart Stores Inc., with 28 discount stores, four “supercenters,” and three Sam’s Club warehouses in Connecticut, for years has lowered its state taxes by essentially paying rent to itself and deducting that cost as a business expense, a company official confirmed Wednesday.

The controversial and complex strategy has saved the world’s biggest retailer several hundred million dollars in taxes in 25 states, according to the Wall Street Journal, which last month reported that on average Wal-Mart paid only about half of the statutory state tax rates for the past decade.

The company spokesman, John Simley, said he didn’t immediately know how much money the arrangement may have saved Wal-Mart in Connecticut, but said it had been used for just over 10 years and is currently employed in connection with all but two of the company’s 35 properties here.

Wal-Mart paid $16.7 million in state and local taxes in Connecticut in fiscal 2006, he added.

Simley defended the company’s use of a “captive” real estate investment trust, or REIT – a corporate entity controlled by individuals associated with the company that pays it rent – saying it is permitted under Connecticut law and that state Department of Revenue Services officials are aware of Wal-Mart’s practice.

“It is allowed in Connecticut and I’m sure other companies use it,” he said. “It’s a lawful structure, and … known to the Department of Revenue in Connecticut and has existed for probably a dozen years.”

Department of Revenue Services spokeswoman Sarah E. Kaufman said Tuesday that she was prohibited from providing details about any Connecticut taxpayer and specifically declined to discuss Wal-Mart.

But Kaufman also insisted that the department was “ahead of the curve on the whole captive REITs issue,” pointing to the 1997 passage of an amendment to a state law that she said closed the loophole still available in other states.

“This is something we noticed more with the banking industry,” she said. “It is not allowed and it’s a rare occurrence when someone does try to claim it on their return.”

Businesses that had exploited the loophole would now find their deductions disallowed, according to Kaufman, who said the department has the discretion to determine the practice improper.

Kaufman added that the department is not now involved in any litigation or administrative proceeding challenging a corporate taxpayer that may have tried to deduct rent it paid to a captive REIT.

But Attorney General Richard Blumenthal said Tuesday that he was launching an investigation of “whether Wal-Mart and other companies are exploiting a loophole in our law that may need to be closed legislatively, or whether the current law can be enforced against them to collect money that clearly should go to Connecticut taxpayers.”

Blumenthal said his probe also would focus on whether existing law “should be enforced more aggressively and vigorously.

“We’ve done some research and there may be some questions about the current law that need to be clarified,” he said.
Simley, the Wal-Mart spokesman, said the company doesn’t use its REIT structure only to lower its state tax burden.

“We have so many landholdings that if we create a separate structure to administer them, we can do it far more efficiently,” he said, adding that it frees the managers of individual stores to deal with other issues.

“One compelling issue is that the REIT is a discrete – and by that I mean separate – organization that can handle capital requirement issues without being tied to the stores,” he continued. “If they need to raise capital or dispose of property it can be done much more effectively through that structure.

“That’s not to ignore that fact that in many states there is a significant tax advantage,” he added.

The Wall Street Journal did not cite Connecticut as one of the states in which Wal-Mart exploits the tax-law loophole which it said was plugged by the federal government years ago but which many states have been slower to close.

Under the arrangement described by the newspaper, a Wal-Mart subsidiary pays rent to a REIT that is entitled to a tax break if it pays out profits in dividends. The REIT is 99 percent owned by another Wal-Mart subsidiary, which gets the REIT’s dividends tax-free. Wal-Mart then gets to deduct the rent from state taxes as a business expense, “even though the money has stayed within the company.”