By setting up shell corporations Wal Mart has been able to avoid paying billions in taxes.
Spitzer and Legislature Start Closing Corporate Loopholes
-John Keevert
The decades long trend of cutting taxes on corporations and leaving individuals holding the bill has been reversed. Governor Spitzer proposed to eliminate a number of specific corporate tax loopholes and was able to get many included in the budget he and the legislature signed off on. While businesses complain loudly about high taxes here, New York ranks mid-pack, 23rd for corporate taxes. New York ends up near the bottom of the "tax-friendliness" scale of the Washington-based Tax Foundation primarily because of the sales and property taxes that also affect individuals, and costs associated with unemployment. It is hoped that when other sources of revenue are increased and more money flows to localities, property taxes can be reduced.
The largest revenue gain comes from adopting "combined reporting," which prevents tax avoidance by multi-state corporations. The Corporation Tax Combined Filing provision (Part 0- ) included in the final budget is expected to generate $271 million. This proposal would require corporations that conduct substantial intercorporate transactions with affiliated companies to file a combined, rather than separate, corporate franchise tax return. Previously, large corporations with operations in New York could increase the costs and fees paid out to branches and affiliates in low-tax states so that it appeared that little taxable profit was made in New York. The new provision requires corporations with a certain level of transactions between affiliates in different states to file tax returns that includes the affiliates, so that appropriate taxes can be assessed.
Wal-Mart has been exploiting another tax loopholes in New York by setting up fake "shell" companies and pretending they don’t own stores that they really do. Wal Mart sets up a real estate investment trust (REIT) out of state and then pays rent on their own store to the REIT. The REIT shell company is entitled to a tax break if it pays its profits out in dividends. The REIT is 99%-owned by another Wal-Mart subsidiary, which receives the REIT's dividends tax-free. Wal Mart deducts the cost of rent so they don’t have to pay corporate income taxes on it. This tax scam has helped Wal-Mart avoid $2.3 billion in state taxes around the country between 1998 and 2005.
By plugging this egregious loophole our state is expected to bring in an extra $99 million in revenue.
Together with provisions on grandfathered corporations, tax shelter reporting, partnership tax abuse, and taxpayer use of corporate status (see www.abetterchoiceforny.org/govanalysis.html for details) many corporations and wealthy individuals will be closer to paying their fair share of NYS taxes.