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Department of Revenue Attacks Wal Mart

Wisconsin’s Department of Revenue is going after Wal-Mart for this:

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.

Let us be clear.  This is a very legal and very widely used tax avoidance technique. 

So here we have a corporation who is doing business in Wisconsin and following the law, and yet our government has decided to single them out and go after them.  Why?  Judging by the DoR’s statements, it’s purely political.  They say:

Revenue Department lawyer Mark Zimmer argues that the world’s largest retailer is not paying its fair share of taxes that support public schools, local police and fire departments and the highways it uses to transport what it sells in Wisconsin.

As a result, Wal-Mart shifts the burden of paying for those services “to individuals and small businesses who are unable to set up such elaborate mechanisms,” Zimmer told the Tax Appeals Commission, which is considering the matter.

If this is a technical violation of the tax law by Wal Mart, then why so much hot rhetoric?  Typically when tax laws are enforced it is a pretty dry affair.  But in this case, the DoR feels it necessary to vilify Wal Mart.  I suspect that if they took this to court, they would lose, which is why they feel the need to try to scare the world’s largest employer into caving on this.  But given that Wal Mart is bigger than the State of Wisconsin, I’m guessing that they won’t be intimidated.

But even if you hate Wal Mart, understand that this is a widely used practice.  If the Department of Revenue decides to go after companies for this, there are going to be a lot of companies in Wisconsin that will have to either change how they do business, pay more in taxes, or pay a lot of lawyers.  Regardless of what they do, it adds to the litany of reasons of why it’s harder to do business in Wisconsin than in many other states. 

Doyle should call off the attack dogs.  This is not only unjust, but would reinforce the impression in the business community that Wisconsin is not friendly to business.

Posted by Owen at 1101 hrs
Politics + Politics - Wisconsin

1. I agree with your last sentence Owen, but understand that to do so Doyle would have to do two impossible things:

   1)  Acknowledge that the state’s climate is bad for business

   2)  Care that the state’s climate is bad for business

   I think it is rather more likely that the state send us all a free Chia Pet with our tax returns.

   Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1227 hrs
   
   
   

2. To take this ridiculous defense of tax loopholes to an extreme - Gee, Wisconsin would be such a great place to live and a great place for business if we could all find such loopholes and reduce our tax burdens to zero.

   Posted by John Foust on August 26, 2007 at 1339 hrs
   
   
   

3. ....great place for business if we could all find such loopholes and reduce our tax burdens to zero.

   In West Bend there is a WalMart at 1515 W. Paradise Drive - I looked up their tax bill - for 2006 it was $240,676.  $2398 to the State; $39,426 to Washington County; $106,045 to the City of West Bend; $74,106 to the West Bend School District; and $18,701 to Moraine Park Technical College.

   That is a lot more than $0 and I bet a hell of a lot more than anyone who reads this site pays (me included).

   That’s why this doesn’t make sense:

   Revenue Department lawyer Mark Zimmer argues that the world’s largest retailer is not paying its fair share of taxes that support public schools, local police and fire departments

   I guess it is like the “big oil” thing.

   Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1421 hrs
   
   
   

4. John, if I read your logic correctly, you’d like to tax all corporate entities who do biz in Wisconsin based on their Wisconsin income.

   You must be a tax lawyer or accountant, because that would be the Full Employment Act for those critters. 

   If Wisconsin goes that route, so will every OTHER State in the Union, meaning that every company will have to fill out 50 State returns and 1 Fed return.  And, of course, each State has its own tricks and giggles on its corporate tax return, meaning that they will not be 50 Xerox copies.

   Doyle’s problem is that Wisconsin is no longer a big-time HQ state for large proseperous companies.  They’re scarcer than fresh dinosaur eggs.

   He knows why, just like WE know why.  His problem is that he’s addicted to spending like an addict is to heroin—can’t get off it to save his life, nor that of the State.

   Too bad.

   Posted by dad29 on August 26, 2007 at 1422 hrs
   
   
   

5. 1) The accusation that they are avoiding their “fair share of taxes that support public schools, local police and fire departments” is BS because the property taxes are being paid.

   2) It is rare today that the business is the real estate owner, for this reason and the fact that the ownership is often different. As the story points out, increasingly, commercial and industrial property is owned by REITs because it is financially smarter for businesses to pay rent than to own real estate and for the real estate to be professionally managed.

   3) If they close the “captive REIT” loophole, it is easily circumvented…if one owner or partner is different between the real estate and the business, the entities cannot be treated as one.

   4) There is no real impediment to anyone setting up this arrangement…for a few hundred dollars, you can create a separate corporation to own the real estate. Then, its a matter of a little more accounting and paperwork each year. There are easily thousands of partnerships and small corporations in the state doing exactly this.

   I think Doyle is just upset that Wal-Mart hasn’t come before his throne with a fat campaign gift…so that he could turn around and bestow some tax money on them at a press event (like he just did here at Gehl Company).

   Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1422 hrs
   
   
   

6. Relating this to the story on the new Costco’s coming in Grafton, where employees make a lot more—$17 an hour compared to less than $11 an hour from Sam Walton—we’re looking forward to switching our business from the western suburbs to northern suburbs (which offer lovelier vistas, too, than does Highway 100).

   But it also would be at least interesting to see a story reporting on whether Costco also does this switch on its books or pays more in property taxes—to deal with what must be an increase in police, infrastructure maintenance, etc., there.  Anyone have insight into that?

   Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1547 hrs
   
   
   

7. Doyle’s just trying to have his cake and eat it too right now.  This whole effort by DOR is stupid.  The answer - combined reporting - is a simple one and one that has been supported by both Democrats and Republicans at various times in the past.  If Doyle doesn’t want to pursue it (it’s in the Senate budget), he should call off the DOR dogs, plain and simple.

   What Doyle is trying to use is the power of shame, because while Wal-Mart’s tax strategy arrangement is legal, it will never pass the smell test with the public.  The public sees it for what it is - tax avoidance.  Perfectly legal tax avoidance, but tax avoidance nonetheless.

   The move towards combined reporting is gaining ground even in red states like Texas (which begins using combined reporting in 2008).  And as we all know, Texas is never wrong about anything.    Wal-Mart’s aggressive pursuit of such tax avoidance strategies is at the forefront of most of these discussions.

   But beyond that, such tax avoidance schemes are often much easier for large corporations to implement, because they can afford large cadres of legal staff to make these arrangements.  That only serves to put local mom-and-pop businesses at an even greater competitive disadvantage.  Might explain why a report last year by the U.S. SBA reported greater levels of entrepreneurship in states that have combined reporting and throwback rules for corporate income tax.

   Sadly, because politicians are involved and are generally incapable of ever giving revenue back to the people, this is going to get caught up in a “tax me more, tax me less” debate.  But in reality, the issue of combined reporting has more to do with tax fairness, and that point shouldn’t be lost in the discussion.  If government had the willpower, it could easily implement combined reporting and use the resultant increase in revenue to “pay for” an across-the-board reduction in individual and corporate income tax rates.

   Posted by Recess Supervisor on August 26, 2007 at 1653 hrs
   
   
   

8. pays more in property taxes—to deal with what must be an increase in police, infrastructure maintenance, etc., there.  Anyone have insight into that?

   The article has to do with the rate of corporate income taxes paid.  Nothing to do with property taxes.  All things being equal (same Fair Market Value, same local taxing jurisdiction), WalMart, Costco, Joe’s Organ Emporium, whatever, would pay the same property tax.  It would be like the taxes on two identical condos - no difference based on who owns them.  The City gets their money for police & fire protection.  It’s the state that is getting less corporate income tax.

   As the article points out, it has to do with “combined reporting” by corporations, whereby all related companies file one tax return.  WI does not use combined reporting, so it is WI that has provided this opportunity for a work-around.

   Separating the ownership of business property is quite common. The owner sets up a Limited Liability Corp to hold the property and then leases it.  Why, I don’t know.  My gas station, the pre-school that our child attended, and the auto repair shop that I took my car to are all owned separately. It has something to do with income being taxed at a higher rate, and depreciation.  All I know is, these people were advised by their accountants to do it this way.

   Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1704 hrs
   
   
   

9. Sorry, txmesommore, I misread your first comment listing all of those local taxes paid as meaning that some were property taxes.  So corporate income taxes go to school districts and voc tech districts?  Not how I understood it.  Or are you saying that those were property taxes, but additional to income taxes?  If not about the topic of corporate income taxes, any further clarification appreciated as to how your figures factor into this discussion.

   Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1713 hrs
   
   
   

10. My father worked for Sears for 40 years.  They did the same thing then don’t know if they do it now.  Nothing new.
        If the state thinks that they will beat Wal-Mart, forget it.  I and 1500 other pharmacists have been suing them for 11 years for over time pay and it is stil in court.
      Wal-Mart doesn’t settle anything.  We will all be in the nursing home, at least I will be, by the time that this comes up after it goes through federal and state court.

    Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1751 hrs
    
    
    

11. I would say all of those were property taxes paid to the local taxing jurisdictions which covers police & fire protection, separate from any corporate income taxes that might be paid to the state of WI.  I am not aware that any corporate income tax revenue goes directly to the taxing bodies, other than via shared revenue, which I know nothing about.

    If not about the topic of corporate income taxes, any further clarification appreciated as to how your figures factor into this discussion

    I started by responding to this:

    ....great place for business if we could all find such loopholes and reduce our tax burdens to zero.

    
    and this:

    Revenue Department lawyer Mark Zimmer argues that the world’s largest retailer is not paying its fair share of taxes that support public schools, local police and fire departments

    and then I followed up in response to this:

    But it also would be at least interesting to see a story reporting on whether Costco also does this switch on its books or pays more in property taxes—to deal with what must be an increase in police, infrastructure maintenance, etc., there

    Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 1803 hrs
    
    
    

12. To change the subject only slightly, ask yourself why Madison-based Sub-Zero, a solid, financially successful maker of high-end appliances would choose to build it’s newest plant in Kentucky (Madison County ironically) and not in Wisconsin.  It’s of stuff like this tax issue that make Wisconsin such a challenging place for businesses.  Good luck bringing business here.

    Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 2032 hrs
    
    
    

13. I recognize that Wisconsin is a ferocious third-world dictatorship run by a governor who wants us all to die - but.

    Owen spews:  ” This is a very legal and very widely used tax avoidance technique. “

    Hello civics class - Walmart will win.

    But the post is contradictory, suggesting its not so clear.  In the end, the idea seems to be that its sleazy but might be legal - and its an outrage for the state to test the issue.

    Owen, feel free to cut WM a check; if it is legally in the right it’ll win and the process is not the human rights nightmare you cry about.

    Posted by .(JavaScript must be enabled to view this email address) on August 26, 2007 at 2347 hrs
    
    
    

14. You know Al, it could be because Kentucky is a better location for Sub-Zero from a distribution standpoint, cutting down on their shipping costs.  It could be because Kentucky threw $1.5 million at Sub-Zero to locate there.  Maybe it’s because Sub-Zero does lots of shipping through UPS and UPS’ airline is based out of the airport in Louisville, 100 miles away.  It could be because the cost of living, and therefore labor costs, are cheaper.

    I have nothing to substantiate any of those claims, but then again, you have nothing to substantiate yours.  Your implication that taxes are the reason Sub-Zero made its decision is nothing but baseless speculation unless you can provide evidence.

    Where a business chooses to locate is a sophisticated decision that usually involves a lot of variables.  Taxes are one of those variables, but hardly the sole variable.  Perhaps it’s better to limit arguments to those in which some facts are known and to stay away from mindless conjecture.

    Posted by Recess Supervisor on August 27, 2007 at 0010 hrs
    
    
    

15. Let us not forget the tale of Dennis Troha’s tax troubles and the immediate dispatch of DOA/DOR lawyers to reconcile the issue…

    On the state plane…

    Will DOA/DOR lawyers be dispatched to Bentonville, AK to clear up this matter?

    John Q. Taxpayer has more distrust of Doyle and his targeting of business than they do of Wal-Mart and it’s advantageous use of the tax code.

    They expect it from Wal-Mart; anyone with a cursory understanding of how a business operates would recognize that these schemes help to hold down costs.  And if it isn’t about cost, they recognize that their 401(k) that has Wal-Mart stock is still healthy.

    However, since November, taxpayers now recognize the emperor has no clothes.  RS is right - Doyle is trying to shame WM into paying taxes it doesn’t owe.

    Posted by .(JavaScript must be enabled to view this email address) on August 27, 2007 at 0013 hrs
    
    
    

16. I have been trying to fight off the WI DOR for over two months now for my 2005 taxes.  Never mind I was deployed with the MN National Guard in the fall of 05’ and couldn’t get home even if I wanted to.  Dec of 06’ I lost my right arm to an Iranian shape charge in Northwest Baghdad and just spent the last 8 months recovering at Walter Reed in Washington, DC. The WI DoR is still trying to charge me late fees and interest for paying my taxes late, even though I used my convalescence leave to do my damn taxes instead of recovering from my injuries like I was supposed to. Sometimes I wonder why I don’t jump the border and go back to Minnesota.

    Posted by J.R. Salzman on August 27, 2007 at 0705 hrs
    
    
    

17. Recess,
    My point was about the general business climate in Wisconsin, which includes taxes and the application of regulations.  There are lots of reasons for companies to move.  My guess is in the SZ instance, it was a combination of incentives, lower taxes, no union and location.  Or it could be the owner likes KY.  Wouldn’t be the first time. 

    Sorry if there aren’t enough facts for you, just “mindless conjecture.”  And thanks for the ad hominem attack.

    Posted by .(JavaScript must be enabled to view this email address) on August 27, 2007 at 0821 hrs
    
    
    

18. I am not a particular fan of Wal-Mart. I worked for them for 5 years, set up most of their pharmacies in southern Wisconsin.  I had the pleasure of working elbow to elbow with Sam Walton half a dozen times.  He was a great man and treated all of his employees like kings.  After he died the company change dramatically.
      However these tantrums against the banks, oil companies, Wal-Mart and other businesses are
        going to elimoinate our chances for growth and good jobs in this state.  The liberals cannot get over the fact that corporations pay the most taxes in the US, when you add the federal and state burden of any country.  Ireland charge 12.5% for fedderal and state.  We charge 40% in Wisconsin, 35% for des, 5% for state.  big difference.
      Then you add the anti-business fervor of those who work for the govenrment and the teachers union and you have one of the worst business climates in the world.
      Wal-Mart is a great blessing to many small towns who had few good jobs and less good shopping.  They brought good jobs with beneifts to areas like Dodgeville, Monroe, Whitewater, Mukwonago etc.  Many farm wives took advantage of that and got jobs that provided the family with benefits, a help of over $40,000 per year in many instances to those families.  You might not like them, but they have the lowest prices and decent benefits.
        Look at Milwaukee, a place begging for decent jobs in the inner city and dimwitted alderman Mike Murphy stopped Wal-Mart from coming in to the city.  That cost them over 300 jobs, most of them with benefits.
      Smart, Huh!

    Posted by .(JavaScript must be enabled to view this email address) on August 27, 2007 at 0856 hrs
    
    
    

19. Imagine a world where all the stores sold only China-made goods, or the the lowest-quality American-made goods!  That would really help our economy.

    Posted by John Foust on August 27, 2007 at 1025 hrs
    
    
    

20. Oh Al, that’s not even an ad hominem attack.  It was a criticism of an argument that had no factual proof.  Me calling you an idiot out-of-hand would be an ad hominem attack (for the record, I don’t think you are an idiot).

    You are right - “stuff like this tax issue” does contribute to why a business locates where it does.  Unfortunately, in contemporary rhetoric, many people phrase things that way to lend broader credence to an argument they can’t really support - like saying “things like race made it difficult for African-Americans in the South to sit at the front of the bus in the 1950’s.”  No, it wasn’t things like race.  It was just race.

    But I think we’re in agreement here, so let’s leave it at that.  Just wanted to explain where I was coming from.  I should have taken your statement more literally.  Apparently that’s how you intended it.  My bad.

    Posted by Recess Supervisor on August 27, 2007 at 1058 hrs
    
    
    

21. So let’s reduce our taxes in the state.  EXACTLY what we would you cut?  The state police?  The mental health institutions?  The county court system?  County courts are mandated by the State, but paid for my the counties’ taxpayers?  Schools?  The UW system?  Highways? The DNR? 
      It’s EASY to talk about paying less taxes, but no one seems to be willing to cut anything.  When I was on a Village Board, everyone was after me to cut taxes.  So I asked them, what would you have me cut?
    —The Police?  (Well, no; of course not!)
    —-The Volunteer Fire Department (one pumper truck costs us $300,000!) and our volunteers don’t even get paid for their work!
    Water and Sewer Department?  (Naturally not!)
    Garbage & Recycling Pick-UP? (Biggest item inthe whole budget)
    Recreation Department?  (Only real “soft spot”) But the parents of over 1,000 children who use our municipal ball parks, pool, etc. said absolutely NO!
      The Library is required by State Law, so we couldn’t cut that!

    As for State government, I think we could easily do without about half of the Department of Financial Management.  It’s supposed to regulate financial institutions (a necessary task), but much of its public work seems to promote banks and credit unions.  Why don’t the bankers and credit unions finance a special promotion effort on their own, instead of using tax monies?

    Posted by R.E. Schallert on August 27, 2007 at 1122 hrs
    
    
    

22. So Schallert, when you ran for office, did you promise to lower taxes?

    Yes, it’s easy for people to constantly whine they’d like lower taxes, but it’s far, far more difficult to figure out how they’d like to manage the cluster of services that people have come to expect, and the rising costs of providing them. 

    So let’s build another subdivision!  Progress!  Growth!  Never mind the new lift station we’ll need, the new roads, the new snowplows and the people to drive them at 3 a.m. when we want to go somewhere the next morning!

    Posted by John Foust on August 27, 2007 at 1139 hrs
    
    
    

23. I have only two points to make here: 

    1.  Corporations do not pay taxes.  They collect taxes from individuals and send them onto the appropriate gov’t.  They pass them to (1) consumers as higher prices, (2) to employees as lower wages or the loss of jobs, (3) to shareholders as lower stock value or lower dividends (4) or as a combination of the three.

    2.  When you cut marginal income tax rates (not eliminate this specific tax or that one) across the board the taxing entity collects more revenue.  This has been proven true by the marginal tax rate cuts that took place in the Warren, Harding, JFK, Regan and GWB administrations.  Lower marginal income rates = higher tax revenues.  Thus, cutting taxes (if done at the marginal rate instead of piecemeal to satisfy particular interest groups) means the gov’t has more money to spend not less.

    Posted by .(JavaScript must be enabled to view this email address) on August 27, 2007 at 1709 hrs
    
    
    

24. But it also would be at least interesting to see a story reporting on whether Costco also does this switch on its books or pays more in property taxes—to deal with what must be an increase in police, infrastructure maintenance, etc., there.  Anyone have insight into that?

    Costco doesn’t open it FIRST Wisconsin location until Wednesday, so me thinks you will not have an answer to that question until after April 15.

    I’m also betting that even if they do take advantage of that loophole, they won’t take a quarter of the PR ash-whooping that Wal-Mart does.

    Posted by Michael J. Cheaney on August 27, 2007 at 1713 hrs
    
    
    

25. “It would” is not past or even present tense, Michael.  And Costco does not turn the key for the first time next week; there have been workers on site for months getting ready.  So it has been “paying rent”—or paying itself—for some time.

    And the question can be asked, even if the annual report is not for a while . . . although some have quarterly reporting.  And I would presume that none would have a due date of April 15, since corporations don’t operate on the calendar year but on the fiscal year.

    As for Sam Walton’s PR, it has been a disaster, hasn’t it?  Yet WalMarts keep making a killing.

    Posted by .(JavaScript must be enabled to view this email address) on August 27, 2007 at 2236 hrs
    
    
    

26. Paul Soglin blogs a bit about how WMC manufactured Wisconsin’s tax hell.

    Sprawled Out gives a useful overview of school costs, property taxes and corporate welfare in Wisconsin in part one and part two.

    Posted by John Foust on August 28, 2007 at 1058 hrs
    
    
    

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