As New Report Exposes Walmart Subsidiaries in Tax Havens, We Look Back at the Company’s Domestic Tax Avoidance Schemes

Today, Americans for Tax Fairness (ATF) released a new report entitled The Walmart Web: How the World’s Biggest Corporation Secretly Uses Tax Havens to Dodge Taxes.  The report  details Walmart’s previously unreported use of subsidiaries in tax havens to avoid paying taxes.

Among other things, the ATF report reveals that Walmart uses complex corporate structures and inter-company transactions in order to shift income from relatively high- to low- or no-tax jurisdictions.

That sounds a lot like what Walmart has been caught doing in the United States in the past. So, we thought a brief review of domestic tax planning schemes by Walmart might provide useful context for this new information.

“Ideas for State and Local Tax ETR Reduction”

In May 2001, Walmart’s Senior Director for Income Tax, Wyman K. Atwell, sent a letter to major accounting firms requesting proposals to provide tax advice and strategies for “minimization of state income taxes ” in Arizona, California, Florida, Illinois, Indiana, Michigan, Minnesota and Pennsylvania.[i]  In August 2002, Walmart’s present-day auditor and tax consultant, Ernst & Young, provided Walmart with a memo marked “Confidential” and titled “Ideas for State and Local Tax ETR [Effective Tax Rate] Reduction.”[ii]  This document summarized more than 15 different strategies for state-level tax avoidance.

Many of the strategies outlined in the Ernst & Young memo bear a strong resemblance to the international strategies discussed in the ATF report. Most importantly, the state-level strategies tend to rely on the use of paper companies to shift profits away from states in which they were earned and into states where the profits will face much lower tax rates.

Whereas Walmart’s international tax avoidance schemes rely heavily on foreign tax havens, Walmart’s state-level tax dodging has been organized primarily through Delaware, which the New York Times calls a “freewheeling offshore haven, right on America’s shores.”[iii]

The tax schemes vary in complexity and legality from state to state, but the underlying results are the same: to cut Walmart’s taxes by hundreds of millions of dollars and deprive state governments of revenues they need to support the public infrastructures and services that Walmart uses to conduct its highly profitable business.

Here are a few examples of how Walmart has used aggressive strategies to make income effectively disappear for the purposes of state-level tax returns.

Scheme: Intangible Holdings Company

For the first half of the 1990’s, Walmart used what the Wall Street Journal called an “intangible holdings company structure” to avoid taxes. Under the plan, Walmart transferred valuable trademarks to a company subsidiary called WNR Inc, based in Delaware, which does not tax income from subsidiaries that exclusively hold intangible assets.[iv] The company then paid its own subsidiary for use of the brands and deducted those payments from its income in certain states, thereby reducing its tax bill.

Ultimately, several states, including Louisiana[v] and New Mexico[vi], challenged this strategy in court and won.  WNR and Walmart merged in 1997.[vii]

Scheme: The Captive REIT

Around the time Walmart was apparently winding down its intangible holdings company strategy, the Company adopted another tax avoidance strategy, the “captive REIT.” Using the captive Real Estate Investment Trust, Walmart essentially paid rent to itself, and deducted the rent payments from its state taxes.[viii]

Walmart Cut Taxes by Paying Rent to Itself HeadlineThese payments were accounting maneuvers, rather than actual transactions between separate parties, as the The Wall Street Journal explained: “Underscoring that the rental payments were cashless Wal-Mart accounting moves, an affidavit filed in North Carolina by the company’s former controller, James A. Walker Jr., states that the payments were made by simply debiting the account of one subsidiary and then crediting the account of the other.”[ix]

Since REITs are legally required to have 100 shareholders, Walmart gave 114 Walmart executives a minimal amount of non-voting stock.  The same Walmart executive was listed as both “landlord” and “tenant” on the lease.

Walmart’s tax advisor and auditor, Ernst & Young, acknowledged in internal documents that the captive REIT’s primary purpose was to avoid taxes.[x]

The Wall Street Journal, in consultation with tax experts, estimated that the company saved roughly $230 million in taxes over a four year period as a result of the captive REIT strategy alone..

After the North Carolina Department of Revenue sued Walmart, the court ordered that the state had the authority to combine affiliated entities tax returns for purposes of calculating state tax liability.[xi]


In order to thwart efforts by companies like Walmart to dodge state income taxes, more than half of US states have adopted a reform called “combined reporting.” The objective is to prevent companies from shifting their income to low-tax states in order to avoid paying taxes in the states where the income was actually earned.

Combined reporting states require multi-state corporations to report the profits of all subsidiaries, in all states, on their state tax filing. The companies are required to pay tax on the share of their total income that is attributed to the state, which is usually determined using a formula based on the share of the company’s total revenues, assets, and employment accounted for by the state.

Prior to the widespread adoption of combined reporting, abusive state-level profit-shifting by corporations cost states billions of dollars in lost revenues.

Sources: Institute for Local Self Reliance, Closing State Corporate Tax Loopholes: Combined Reporting, June 2, 2010; Institute for Taxation and Economic Policy, Combined Reporting of State Income Taxes: A Primer, August, 2011

Scheme: The 80/20 Company
In December 2001, Walmart opened an office in Florence, Italy for a new subsidiary named WMGS Services LLC (“WMGS”), which would be central to a new effort to save millions in state taxes each year.

Wal-Mart made WMGS the only operating unit of a real-estate subsidiary that controls billions of dollars of the retailer’s property in Illinois and other states. Technically, however, the subsidiary’s only employees are based in Italy. This allowed the real-estate unit to claim that its operations are foreign, and therefore exempt from Illinois corporate income taxes.

The strategy used by Walmart in this case is known as an “80/20 company,” signifying that a domestic subsidiary conducts at least 80% of its business overseas. Since states don’t typically tax foreign income, this structure helps to shield foreign operations from state taxation. The strategy helps companies like Walmart avoid taxes, even in combined reporting states like Illinois that make it more difficult for companies to avoid taxes simply by shifting income to other states.

In 2007, the State of Illinois demanded $26.4 million in back taxes and penalties, after objecting to the company’s effort to avoid these taxes.   Walmart paid the State, but appealed the decision in Illinois Circuit Court.  The Director of the State Department of Revenue called the type of strategy employed by Walmart “shocking to the conscience.”[xii]


[i] See,
[ii] See,
[iii] Leslie Wayne, “How Delaware Thrives as a Corporate Tax Haven” The New York Times (June 30, 2012)
[v] Jesse Drucker, “Walmart Cuts Taxes By Paying Rent to Itself.”   Wall Street Journal, Feb. 1, 2007

[vi] WAL-MART STORES, INC. (Successor to No. 06-07 WMR, Inc.); ID No. 02-344332-00 4 ASSESSMENT NOS. 2219795 & 2219796   Available at:
[vii] Ibid
[viii] Jesse Drucker, “Walmart Cuts Taxes By Paying Rent to Itself.”   Wall Street Journal, Feb. 1, 2007

[ix] Ibid
[x] Jesse Drucker, “Walmart Cuts Taxes By Paying Rent to Itself.”   Wall Street Journal, Feb. 1, 2007
[xi] Charles B. Neely Jr., Nancy S. Rendleman & Robert W. Shaw, Walmart Stores East, Inc, v. Hinton, Tax Assessments, January 2010, Available at:
[xii]  Jesse Drucker, “Why Wal-Mart Set Up Shop in Italy.” Wall Street Journal, November 14, 2007  Available at: