Civility, Ethics and Workplace Behavior
Avoiding the 'Ethical Slippery Slope'

Walmart's Uses Tax Shelters while failing to pay a living wage to its Employees

Tax Minimization and Social Responsibilities of Walmart

Recently it was revealed that Walmart is the beneficiary of billions of dollars per year in federal subsidies, according to new report from the non-partisan, progressive group Americans for Tax Fairness, a coalition of 400 national and state organizations for tax reform.

The report estimates that Walmart and the Walton family—which co-founded the company and still owns a majority share—collectively profit from nearly $7.8 billion per year in federal subsidies and tax breaks.

The $7.8 billion includes an estimated $6.2 billion in public assistance for low-wage Walmart employees, including programs like food stamps, subsidized housing, and Medicaid. It also includes an estimated $70 million per year in “economic development subsidies” from state and local governments eager to host Walmart in their cities.

Walmart spokesperson Randy Hargrove described the report as “not accurate,” citing a detailed response to its main points on The author of the response, columnist Tim Worstall, described the report as “fantastical nonsense” and took issue with the claim that welfare acts as an effective subsidy for Walmart.

“The existence of these welfare payments means that the reservation wage rises. That is, an employer needs to pay people more to come into work because they get an income (however low that is) whether they work or not,” Worstall wrote.

For members of OUR Walmart, the labor activist group that has led major strikes against the company, the primary issue seems to be whether Walmart could afford to raise wages for them such that they would no longer need public assistance.

“Many Walmart workers like me can’t cover the rent or feed our families without public assistance because of Walmart’s low wages,” said OUR Walmart member and Walmart employee Anthony Goytia in a statement.

In November 2013, a Walmart in Ohio was discovered to be collecting food donations for its own employees, many of whom evidently couldn’t afford their own Thanksgiving dinners on their current salaries. A study from the Democratic staff of the House Committee on Education and the Workforce claims employees at a single Wisconsin Walmart receive about $1 million per year in public assistance. “The bottom line is we provide opportunity,” said Hargrove.

In another matter, Walmart has received $104 million in tax breaks for giving its executives huge bonuses, according to a report by the Institute for Policy Studies, a Washington think-tank.

The retail giant received tax write-offs for giving out $298 million in performance pay to executives over the last six years, according to the report. Loopholes ultimately cost regular taxpayers dearly in terms of government service and higher tax rates, the groups said.

Frank Clemente, the executive director at Americans for Tax Fairness, called the tax break “outrageous” and added that it’s “truly one of the most perverse loopholes of all time.” Sarah Anderson, the global economy director at Institute for Policy Studies, said that the $104 million “would have been enough, for example, to cover the cost of providing free lunches for $33,000 children. What’s even more outrageous is that this is a company that pays its workers so little that many of them must rely on such public assistance programs,” Anderson said in a statement.

The report, titled “Walmart’s Executive Bonuses Cost Taxpayers Millions,” focuses on tax law that allows companies to deduct unlimited amounts for performance-based compensation. The law was put in place in 1993 in order to discourage excessive pay, according to the study, which goes on to say that Walmart has abused the law.

Former Walmart CEO Michael Duke, who was replaced suddenly at the end of 2013, received $116 million in stock options and performance-based compensation over five years, which lowered federal tax payments by $40 million, according to the study. Meanwhile, Doug McMillon, the current CEO, is said to have received $58 million in performance-based compensation that translates into a $20 million tax break.

Some members of Congress have introduced legislation to change the law to prohibit tax deductions for executive bonuses. Rep. Lloyd Doggett, a Democrat from Texas who is pushing such a bill, excoriated big corporations for forcing small businesses and families to pay more because of the current tax law.

“Publicly held companies like Walmart can continue paying their executives multimillion dollar bonuses; just don’t expect the American taxpayer to pick up your tab,” he said in a statement. “It makes no sense for working families to subsidize those making nearly 300 times the average worker.”

In yet a third story, Walmart pays billions of dollars a year in rent for its stores. Luckily for Walmart, 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 Walmart from paying several hundred million dollars in taxes, according to court records and a person familiar with the matter.

Below there is an excerpt from the lease agreement signed between a Walmart-owned Real Estate Investment Trust (REIT) and another Walmart unit.

The arrangement takes advantage of a tax loophole that the federal government plugged decades ago, but which many states have been slower to catch. Here's how it works: One Walmart subsidiary pays the rent to a REIT, which is entitled to a tax break if it pays its profits out in dividends. The REIT is 99%-owned by another Walmart subsidiary, which receives the REIT's dividends tax-free. And Walmart gets to deduct the rent from state taxes as a business expense, even though the money has stayed within the company.

North Carolina tax authorities are challenging Walmart, saying its REIT strategy was intended to "distort [the company's] true net income," according to its filings in the case in Superior Court in Raleigh, N.C. The state calls captive REITs a "high priority corporate tax sheltering issue" and in 2005 ordered Walmart to pay $33 million for back taxes, interest and penalties stemming from the REIT. The company paid it and then sued the state for a refund.

A single Walmart real-estate official, Tony Fuller, represented the company both as tenant and landlord in its lease with itself. Ernst & Young LLP, the accounting firm that sold the strategy to Walmart, also is the company's outside auditor. In its internal sales training materials, the accounting firm explicitly labeled the strategy as a method to reduce taxes -- a red flag to tax authorities, who often demand that tax shelters have other business purposes.

Walmart attorneys say in court filings that the strategy is perfectly legal and that North Carolina is exceeding its authority. A spokesman for the Bentonville, Ark., company, John Simley, said Walmart "is comfortable with its current structure and is in compliance with federal and state tax laws." He added that the REIT structure was adopted to "more effectively and efficiently manage the company's real-estate portfolio, including the impact on the company's overall state tax planning."

Companies such as Walmart violate their corporate social responsibilities when they knowingly and purposefully develop and/or use existing techniques to lower their taxes and shelter income while, at the same time, not paying a living wage to so many of its employees. I suppose all corporations do these things, perhaps with the exception of the REIT. I know the tax law must be revised to eliminate the loopholes. I also believe that Walmart has violated the public trust by using tax minimization strategies, albeit legal ones under the law, at the same time their employees must rely on public assistance to survive.

Blog posted by Steven Mintz, aka Ethics Sage, on July 10, 2014. Dr. Mintz is a professor in the Orfalea College of Business at Cal Poly, San Luis Obispo. He also blogs at: