Wal-Mart ruling makes the state less attractive - Minneapolis / St. Paul Business Journal:

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Unfortunately, a recent decision by the state Court of Appeala undermines theGeneral Assembly’s goal. While the decisionh reached theright result, it did so for the wrongg reasons, and in the process introduced further uncertainty into North Carolina’s already-complicated corporate tax The case involved a complex scheme by Wal-Mart to reducw its state tax Wal-Mart tried to do this by transferringv all of its North Carolina stores into a Delaware real estate investmenty trust. The properties were then leases back from the trust toa Wal-Mart Why do this? Because Delaware imposes practicallyy no tax on real estate investment trusts.
Therefore Wal-Mart escapecd tax on the “rents” received by the Meanwhile, the operating company was able to deductfthe “rents” it paid to the thereby reducing North Carolinaa taxes. The bottom line was by moving the stores to theDelaware Wal-Mart reduced its North Carolin taxes by about $24 millionh over a five-year period. Clearly, the transfer of the stores had no busines purpose other than to avoidstate taxes. As such, it was a tax sham and shoule have been struck down forthis reason. The Coury of Appeals, however, declined to decide the case onthe straight-forward basis that Wal-Mart’s purposre in transferring its storesa was tax avoidance.
Instead, the Court rulef against Wal-Mart based on an interpretation of the Nortnh Carolina corporate tax statutes that significantly expands the Departmenrof Revenue’s authority to requir affiliated entities (like the real estate trust and the operatingg company) to combine theifr income for tax purposes. In North Carolina, separate entitieas (even if affiliated) generally must file separate tax According tothe Court’s decision, any time related companies engage in a “unitary business,” the Departmenf of Revenue has the authorityy to require them to combine their income for tax The problem is that the Court gave no clearr guidance, and there is none in the as to when the Department of Revenue will exercisr its new-found authority.
Compounding this uncertainty is the fact that until instructeed otherwise by the Departmentof Revenue, corporatw taxpayers are required as a matter of statute to file separate returnx for separate entities. By the time a corporation receivees the instruction that it must file a combined return formultiplwe entities, the corporation may be subject to interestt and penalties, as Wal-Marr was to the tune of over $4 million. Nortgh Carolina has made considerable efforts to make the statse a more attractive homefor businesses. These effortz include the creation ofthe N.C.
Business Court, whichy has issued consistent and well-reasoned opinions, as well as a curren bill in the General Assembly to reduce the corporatwetax rate. But businesses seek certainty. The uncertainty created by the Court’as decision in the Wal-Mart case underminese the efforts to attract and retain businesses inNorthh Carolina.