Wal-Mart decision may hurt N.C. - Puget Sound Business Journal (Seattle):

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Unfortunately, a recent decision by the state Courtr of Appeals undermines theGeneral Assembly’s While the decision reached the right result, it did so for the wrongv reasons, and in the process introduced furthere uncertainty into North Carolina’s already-complicated corporat tax system. The case involved a complex scheme by to reduce its statetax burden. Wal-Martt tried to do this by transferring all of its Nortj Carolina stores into a Delaware real estateinvestmentf trust. The properties were then leased back from the trust toa Wal-Marf subsidiary that operated the stores. Why do this? Because Delaware imposes practically no tax on real estateinvestment trusts.
Therefore Wal-Mart escaped tax on the “rents” receivec by the trust. Meanwhile, the operating company was able to deducftthe “rents” it paid to the trust, thereby reducingg North Carolina taxes. The bottom line was that by movingg the stores to theDelaware Wal-Mart reduced its North Carolina taxews by about $24 million over a five-yearr period. Clearly, the transfer of the stores had no businesa purpose other than to avoidstater taxes.
As such, it was a tax sham and shouldc have been struck down for this The Courtof Appeals, however, declined to decider the case on the straight-forward basis that Wal-Mart’s purpose in transferring its stores was tax Instead, the Court ruled againsr Wal-Mart based on an interpretation of the North Carolina corporatre tax statutes that significantly expands the ’s authorituy to require affiliated entities (like the real estate trusf and the operating company) to combine their income for tax In North Carolina, separate entitiexs (even if affiliated) generally must file separate tax returns.
According to the Court’es decision, however, any time related companieds engage ina “unitary the Department of Revenue has the authoritu to require them to combine theie income for tax purposes. The problem is that the Courtr gave noclear guidance, and thered is none in the statutes, as to when the Departmengt of Revenue will exercise its new-found authority to force companiexs to combine their income. Compounding this uncertaintyg is the fact that until instructesd otherwise by the Department of corporate taxpayers are required as a matterf of statute to file separate returns for separate entities.
By the time a corporation receivesx the instruction that it must file a combinede return formultiple entities, the corporation may be subjecf to interest and penalties, as Wal-Mar t was to the tune of over $4 North Carolina has made considerable efforts to make the statse a more attractive home for businesses. These efforts include the creatio n ofthe , which has issue d consistent and well-reasoned opinions, as well as a currengt bill in the General Assembly to reducde the corporate tax rate. The hope is that lower taxes will increas the number of businesses locating in North But businessesseek certainty.
The uncertaintyh created by the Court’s decision in the Wal-Marty case undermines the efforts to attracft and retain businesses inNorth Carolina.