Friday, February 02, 2007

Close the Real Estate Investment Trust loophole, All REIT?

Wall Street Journal ($ req.):
As the world's biggest retailer, Wal-Mart Stores Inc. pays billions of dollars a year in rent for its stores. Luckily for Wal-Mart, in about 25 states it has been paying most of that rent to itself -- and then deducting that amount from its state taxes.

The strategy is complex, but the bottom line is simple: It has saved Wal-Mart from paying several hundred million dollars in taxes, according to court records and a person familiar with the matter. And Wal-Mart is far from alone.

The arrangement takes advantage of a tax loophole that the federal government plugged decades ago, but which many states have been slower to catch.
The result of the circuitous transaction: Wal-Mart could effectively turn rental payments to itself into state level tax-deductions in most of the states where the payments have been made. Under typical circumstances, rent paid to a third-party landlord also would reduce taxable income. But that would ordinarily be cash out the door, like most other tax-deductible expenses. Here, the majority of the tax-deductible rental payments came straight back to Wal-Mart.

The national tax savings have been significant.
Tax planning, or tax avoidance is not tax cheating. But Wal-Mart is gaining an advantage of over in-state rivals in high-tax states. It's time for states to close these loopholes by legislation.

And, yes, I am still happy to be a Wal-Mart apologist -- most because Wal-Mart has done so much for the poor and lower middle class. But if I was giving PR advice to Wal-Mart I'd say the twists and turns they've achieved to achieve these tax savings don't look pretty in public.

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