The North Carolina Court of Appeals on Tuesday upheld a lower court ruling that the state could recalculate taxes owed by Wal-Mart Stores Inc. to include its subsidiaries.
The unanimous decision by a three-judge panel could have consequences for companies that use out-of-state proxies to reduce their tax obligations.
The Court of Appeals found that, in 1996, Wal-Mart transferred all of its stores’ property to a separate Delaware real estate trust. The trust, controlled by Wal-Mart Property Co., then leased the premises back to Wal-Mart Stores East Inc., a regional affiliate that operates stores in 29 states.
According to court documents, Wal-Mart Stores East deducted rent paid to the real estate trust from its net income when reporting to North Carolina. Documents showed Wal-Mart property subsidiaries paid a large portion of the rent back to Wal-Mart Stores East as dividends, which the regional division then classified as non-business income and therefore nontaxable.
In 2005, after auditing the retailer’s tax statements from 1999 through 2002, then-North Carolina Secretary of Revenue Reginald Hinton ordered Wal-Mart to file a combined return for Wal-Mart Stores East, Wal-Mart Property Co. and the trust. In May 2005, the retailer issued the state a check for $26.6 million.
The company filed suit against Hinton in 2006, alleging the state had no authority to force the combination. It sought a $30.2 million tax refund. In January 2008, a lower court issued a summary judgment in favor of the state.
The Court of Appeals ruling found that Hinton acted within the authority of state statute.
In the opinion, Judge Donna Stroud wrote, “The language of the statute is broad, allowing the secretary to require combined reporting if he finds as a fact that a report by a corporation does not disclose the true earnings of the corporation on its business carried on in this state.”
Daphne Moore, a spokeswoman for Wal-Mart, said the company is reviewing the decision and evaluating its next step. She said the company believes “all taxpayers should be able to rely on clearly defined laws that are reasonably enforced.”