Critics say corporations use "loophole" to avoid paying state taxes.

If you recently purchased some cheap underwear at the Kmart on St. Michael's Drive, you can take comfort in knowing you're not padding the pockets of one of the state's top corporate tax evaders.***image1***

That's because Kmart, like Wal-Mart and approximately 100 other corporations that do business in New Mexico, has been taken to task by the New Mexico Tax and Revenue Department for the way it used to underpay its state tax bill. Kmart, currently owned by Sears Holding Corporation, which is based in Hoffman Estates, Ill., fought the state all the way to the New Mexico Supreme Court before losing the case.

But an ongoing campaign led by the New Mexico Fiscal Policy Project seeks to put an end to case-by-case tax assessments that can drag on for years.

For example, the Kmart litigation originated with disputed tax assessments dating back to 1991, but was only resolved three years ago.

The proposed remedy: Recoup an estimated $90 million in uncollected corporate income taxes by legislating something called "mandatory combined reporting" for corporations operating in New Mexico.

"I just think this is an area that cries out for reform," State Rep. Peter Wirth, D-Santa Fe, tells SFR.


According to Gerry Bradley, research director for the New Mexico Fiscal Policy Project, current state law allows corporations the option of reporting their earnings as separate entities out of state, and the state's limited number of tax assessors can't possibly verify the accuracy of the income reported by the state's nearly 20,000 corporate filers.

"If we had combined reporting we'd be solving this problem all at once instead of solving it one assessment at a time," Bradley says.

Bradley estimates that "dozens or low hundreds" of corporate filers shift their incomes to so-called passive investment companies located in income-taxless states such as Nevada or Delaware and skip out on their fair share of taxes here at home.

"Unfortunately, New Mexico law has a loophole that multi-state corporations can exploit to avoid paying CIT [corporate income tax] to New Mexico," Bradley, a former state Labor Department economist, writes in a March 10 brief.

Jim Nunns, the state's tax policy director, doesn't see it the same way.

"I wouldn't call it a loophole," he says. In fact, Nunns deems the existing policy "a conscious decision" by state lawmakers that "may act as an incentive for some companies to be here, particularly as they start up."

But Nunns doesn't dispute the claim that moving to mandatory combined reporting of multi-state corporations' incomes would mean an increase of roughly $90 million in annually recurring tax revenue for the state.

Wirth is well aware of that Legislative Finance Committee estimate. Earlier this year, Wirth sponsored House Bill 51, which would have required out-of-state corporations to file combined reports that list all revenue earned by their subsidiaries. He would have pumped the additional tax revenue into the state's funding formula for public schools.

"The argument that's always made against this bill is that it's anti-economic development," Wirth says. "And my response is that education is the most important economic development tool we can have in New Mexico."

HB 51 marked the fourth time the two-term lawmaker pushed a version of the bill. Despite support from legislative heavyweights such as House Speaker Ben Lujan and Rep. Luciano "Lucky" Varela, both Santa Fe Democrats, Wirth's proposal couldn't even get out of its first committee. The influence of corporations in the Roundhouse, especially industry lobbyists, is often fingered as the culprit.

Earlier versions of Wirth's bill would have mandated combined reporting, but also lowered the state's top corporate income tax rate to 6.4 percent from the current top rate of 7.6 percent.

According to a report written by Nunns last year, New Mexico's corporate income tax is slightly on the high end of what most states charge (20th highest among the states) and the very largest corporate taxpayers pay more than 70 percent of the $331 million generated by the state's corporate income tax.

Bruce Fort, a former state Tax and Revenue Department attorney, has his own reasons for wanting to move toward a mandatory system of combined reporting.

"The Wal-Mart and Kmart cases took up two years and five years of my life, respectively," he says. Fort, the current legal counsel for the

Multi-State Tax Commission, is referring to the precedent-setting cases that he litigated on behalf of the state. He's also underscoring how long such tax battles can take.

In the case of Wal-Mart, an $11.6 million corporate income tax assessment was ultimately upheld in May 2006, when the giant retailer was found to be shifting earnings from its New Mexico-based stores to a Delaware-based holding company. The Kmart case, finally settled in 2005, resulted in a $1.2 million assessment in unpaid income and gross receipts taxes. Kmart Properties of Michigan was found to be collecting licensing fees from the discount retailer's New Mexico stores simply for use of the retail chain's name, offsetting its reported taxable income. SFR was one of the first publications to expose Kmart's controversial accounting. [Cover story, Nov. 8, 2000: "Attention, Kmart Shoppers!"]

Like Bradley, Fort favors mandating combined reporting.

"It's our belief that [the current system] really puts the states at the mercy of the corporate accounting departments," Fort says. "Legislation is better than litigation because there's no way the state can go after the hundreds and hundreds of holding companies that have been established," he adds.

Vicki Pozzebon, executive director of the Santa Fe Alliance, also would like to see a legislative fix. She argues that the local businesses the Alliance represents are at a competitive disadvantage since they can't shelter income in out-of-state holding companies. Many local businesses, she argues, effectively pay a higher tax rate than their multi-state competitors.

"It's sort of unconscionable that our government would let this happen," she says. But they do.