January 29, 2009 04:59 PM UTC

Closing The "Wal-Mart Loophole"

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• by: Colorado Pols

In case you haven’t noticed, there’s a budget crisis in Colorado. When this happens, governments at every level are forced to look at any and all ways they can maximize revenue under the legal constraints imposed on them.

One way to do this is by identifying loopholes in existing law that allow individuals and business to skip out on taxes they would otherwise have to pay. This isn’t always a popular process, but sometimes a ‘villain’ can be found that nobody will jump up and down to defend (see title)–except for lobbyists being paid to, of course.

Yesterday, Rep. Claire Levy introduced a bill to regulate a “tax evasion scheme” called a captive real estate investment trust–essentially a shell company owned by related entities that exists to transfer profits offshore to avoid paying taxes. Rep. Levy’s bill would require that profits earned by captive REITs be taxed like any other corporate income earned in the state of Colorado.

Full release follows; the bill passed the House Finance Committee by a 10-1 vote yesterday. Says Rep. Levy, “These companies are abusing the public trust. By sending their Colorado profits overseas and back through a series of shell corporations, they avoid paying their fair share of taxes.  This bill is a way to create transparency.”

BILL ADDRESSES MISUSE OF TAX CODE

Lawmakers Expose Corporate Tax Cheats and Demand Transparency

(DENVER)  State Representative Claire Levy (D-Boulder) today presented a bill targeting a tax evasion scheme used by Wal-Mart and other large corporations.  Eleven other lawmakers joined Rep. Levy as sponsors of the legislation, which was passed out of the House Finance Committee on a bipartisan 10-1 vote.

The bill requires corporations to declare the use of suspect transactions on their corporate tax return. The targeted tax evasion scheme makes use of a financial arrangement know as a Real Estate Investment Trust (REIT). Normally, a REIT has 100 investors, each with a small stake in the investment company. In Wal-Mart’s case, the company transfers the ownership of their Colorado stores to a REIT which is 99% owned by Wal-Mart itself and the remaining 1% is owned by 99 Wal-Mart executives.  That company then transfers the profits to an overseas company which exists simply to avoid having to report the income to the state government.

“These companies are abusing the public trust,” said Rep. Levy.  “By sending their Colorado profits overseas and back through a series of shell corporations, they avoid paying their fair share of taxes.  This bill is a way to create transparency.  It permits the Department of Revenue to look at corporate transactions and make sure they have real economic purposes and are not intended only to avoid or reduce tax liability.”

“This bill does not create a new tax.  These are taxes that are rightfully owed.  The people of Colorado pay taxes; so should corporations,” said Rep. Levy.  “It is time to put a stop to this sham.  The underpayment, and in some cases outright avoidance, of taxes greatly stifles economic development in Colorado.”

The Wall Street Journal and others have noted that Wal-Mart pays itself rent and calls that a tax-deductible business expense, thus skirting payment of standard taxes.  The Journal notes that Wal-Mart avoided paying $350 million in state taxes between 1998 and 2001.  

Many other states have taken action against the company in recent years.

Rep. Levy explained that federal tax law created REITs to allow small investors to participate in real estate markets that would otherwise require very large amounts of capital.  Legitimate use of REITs is not affected by this bill.

The bill implements the long-standing policy in Colorado that corporate profits earned in the state are subject to state tax, and it distinguishes between valid Real Estate Investment Trusts and Captive REITs such as Wal-Mart’s.

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