Wal-mart good at state tax avoidance

This shows how Wal-mart can hire high priced tax avoidance helpers to lower its tax burden. Of course small business will not be able to avail itself of such help. It means of course that states must find their funds elsewhere. Sometimes fortunately it seems the high risk strategies get them caught and they have to pay.


This Wall Street Journal article describes how Wal-Mart is able to pay
about half as
much state tax as a typical corporation.

Drucker, Jesse. 2007. "Inside Wal-Mart's Bid To Slash State Taxes."
Wall Street
Journal (23 October): p. A 1.

"In May 2001, Wal-Mart Stores Inc. issued an appeal to big accounting
firms: Find us
creative new ways to cut our state tax bills. Ernst & Young LLP swung
into action.
Senior tax experts at the big accounting firm swapped ideas via email
and in a series
of meetings. At least one gathering, according to an internal Ernst &
Young calendar,
took place in Wal-Mart's headquarters in the "Tax Shelter Room"."

"Big companies hardly ever discuss how outside accountants, lawyers and
investment
bankers help them cut their tax bills. But Ernst & Young's
contributions to
Wal-Mart's state-tax minimization project are outlined in a raft of
documents filed
in recent months in North Carolina state court, where the state's
attorney general is
challenging a Wal-Mart tax-cutting structure involving real-estate
investment trusts.
The material, which includes company emails and memos, provides a rare
window into
accountants' role in generating tax-reduction ideas at one major
company."

"Companies often assert that tax savings are simply happy byproducts of
transactions
pursued for other business reasons. But documents from the North
Carolina case
indicate that Wal-Mart, from the outset, had one primary purpose:
cutting its state
income taxes. Ernst & Young worked to fulfill that goal. In 2002, for
example, the
accounting firm delivered a 37-page proposal laying out a smorgasbord
of 27 potential
tax strategies, most tailored to a particular state's tax code. It
described one of
them as "a very aggressive strategy with considerable risk."

"Publicly traded companies reduced their federal income taxes by about
$12 billion in
2004 through potentially abusive tax transactions, according to
Internal Revenue
Service data. Some experts say companies save far more than that each
year through
elaborate tax-cutting maneuvers."

"Wal-Mart's 2001 letter to accounting firms got right to the point. It
began:
"Wal-Mart is requesting your proposal(s) for professional tax advice
and related
implementation services in connection with minimization of state income
taxes in the
following states: Arizona, California, Florida, Illinois, Indiana,
Michigan,
Minnesota, and Pennsylvania"."

"State income-tax rates for corporations average about 6.9%, and come
on top of a
federal statutory rate of 35%. Tax rates vary from state to state, and
some states
have no corporate tax at all on certain income. That provides ample
opportunity for
so-called tax arbitrage, in which companies allocate expenses and
revenues between
states in order to minimize taxes owed."

"On average, Wal-Mart has paid taxes at a rate equal to about half of
the average
statutory state rate over the past decade, according to an analysis of
the company's
regulatory filings by Standard & Poor's Compustat."

"In the early 1990s, it employed an "intangibles holding company," a
unit operating
in tax-friendly Delaware into which it transferred ownership of its
brand names such
as Sam's Club. It then made payments to that unit for use of those
brands, deducting
them as expenses from its taxable income in other states, according to
court records.
That strategy fell out of favor after several states successfully
challenged Wal-Mart
and other companies in court over the maneuver."

"Wal-Mart set aside about $526 million for state and local income taxes
last year,
not including its substantial property-tax bills, according to the
company's
financial reports. But its various state tax-cutting strategies seem
to have had an
impact. On average, Wal-Mart has paid taxes at a rate equal to about
half of the
average statutory state rate over the past decade, according to an
analysis of the
company's regulatory filings by Standard & Poor's Compustat."

"After Wal-Mart hired the firm in 1996 ..., an Ernst & Young tax
executive urged his
team to be discreet, according to a staff memo included in North
Carolina court
records. "We don't think there is much the state taxing authorities can
do to
mitigate these savings to Wal-Mart, however some states might attempt
something if
they had advance notification," he wrote. "We think the best course of
action is to
keep the project relatively quiet .... there just seems to be too many
opportunities
for it to get out to the press or financial community and we all know
they are
difficult to control, particularly when we are dealing with a client as
well-known as
Wal-Mart"."

"David Bullington, Wal-Mart's vice president for tax policy, said in a
deposition
that he began feeling pressure to lower the company's effective tax
rate after the
current chief financial officer, Thomas Schoewe, was hired in 2000. Mr.
Schoewe was
familiar with "some very sophisticated and aggressive tax planning,"
Mr. Bullington
said, according to a transcript of the deposition, taken by the North
Carolina
attorney general's office in July. "And he ride herds [sic] on us all
the time that
we have the world's highest tax rate of any major company"."

"As Ernst & Young worked on its proposals, one high-ranking tax partner
sent an email
to a colleague addressing a concern often faced by companies: how to
describe a
tax-driven transaction in a way that won't create problems later on
with tax
authorities. "You asked if we have a document that details how the tax
savings will
work, how much they will save .... We really don't have anything like
that except
for the sales document, partly because we have avoided calling this a
'tax' project,
to show that we did not have a tax savings motivation, rather it is a
'domestic
restructuring' project," he wrote."

"As for Wal-Mart's "Tax Shelter Room," North Carolina officials asked
Mr. Bullington
about the odd name. In his deposition, the Wal-Mart vice president said
the moniker
was "a bit of a pun," stemming from the conference room's use by
tax-department
employees to conduct safety drills for natural disasters such as
tornadoes."



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