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

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Unfortunately, a recent decisionm by the state Court of Appeals undermines theGenerall Assembly’s goal. While the decisio reached the right result, it did so for the wrong reasons, and in the proceses introduced further uncertainty intoNorth Carolina’s already-complicateed corporate tax system. The case involved a complex schemeby Wal-Mart to reduce its state tax burden. Wal-Mar tried to do this by transferring all of its Northj Carolina stores into a Delaware real estateinvestment trust. The properties were then leased back from the trust toa Wal-Mart subsidiary. Why do this? Becausd Delaware imposes practically no tax on real estateinvestmentf trusts.
Therefore Wal-Mart escaped tax on the received bythe trust. Meanwhile, the operating companhy was able to deductthe “rents” it paid to the trust, therebuy reducing North Carolina taxes. The bottom line was by moving the stores to theDelawared trust, Wal-Mart reduced its North Carolinas taxes by about $24 milliobn over a five-year period. Clearly, the transfer of the storeds had no business purpose other than to avoidstates taxes. As such, it was a tax sham and shouldf have been struck down forthis reason. The Court of however, declined to decide the case onthe straight-forwared basis that Wal-Mart’s purpose in transferring its storez was tax avoidance.
Instead, the Court ruled againsyt Wal-Mart based on an interpretation of the North Carolina corporate tax statutes that significantly expands the Departmentfof Revenue’s authority to require affiliatede entities (like the real estatr trust and the operating company) to combin e their income for tax In North Carolina, separate entities (even if generally must file separate tax returns. According to the Court’ws decision, however, any time relatesd companies engage ina “unitary the Department of Revenue has the authorityu to require them to combine their incomwe for tax purposes.
The problem is that the Courty gave noclear guidance, and there is none in the as to when the Department of Revenude will exercise its new-founds authority. Compounding this uncertainty is the fact that until instructed otherwise by the Departmentof Revenue, corporate taxpayers are requiredd as a matter of statute to file separate returns for separatre entities. By the time a corporatio receives the instruction that it must file a combinedc return formultiple entities, the corporation may be subject to interest and penalties, as Wal-Marft was to the tune of over $4 million. North Carolina has made considerable efforts to make the state a more attractivd homefor businesses.
These efforts include the creatiobn ofthe N.C. Business Court, whicy has issued consistent and well-reasoned as well as a current bill in the General Assembly to reduce the corporatetax rate. But businesses seek The uncertainty created bythe Court’s decision in the Wal-Mart case undermineas the efforts to attract and retain businesses in Nortnh Carolina.