In a lawsuit filed in Wake County Superior Court, the world's largest retailer contends that the state overstepped its authority. According to the suit, the state combined Wal-Mart's state income tax return with the returns of two legally separate entities the company owns or controls -- including one that doesn't do business in North Carolina -- to determine Wal-Mart's tax bill.

The attorney representing Wal-Mart, Jack Cummings of the Raleigh office of Alston & Bird, said he also has filed a similar suit seeking a $3.5 million refund on behalf of Sam's Club's operations in North Carolina. The Sam's Club warehouse store chain is owned by Wal-Mart.

The lawsuit's outcome could have ramifications beyond Wal-Mart and Sam's Club. Cummings said he is aware of "other similarly situated taxpayers."

Wal-Mart has paid a total of $30.2 million in extra taxes, interest and penalties that the state claimed it owed, after an audit for the four fiscal years that ended Jan. 31, 2002, according to the lawsuit. Now it is seeking a refund of that money, plus interest.

The suit was filed on behalf of Wal-Mart Stores East, a Wal-Mart subsidiary that operates the chain's 112 stores in North Carolina. The defendant is E. Norris Tolson, the state secretary of revenue.

Last month, the state responded to the lawsuit with a motion to dismiss the case. Revenue department spokeswoman Kim Brooks had no immediate comment on the case.

In its lawsuit, Wal-Mart makes a variety of arguments contesting the legality of how the state calculated its tax bill. They include violations of due process and the commerce clause of the U.S. constitution as well as violations of the state constitution.

During the tax years at issue, the state computed Wal-Mart's tax bills by combining the company's tax return with tax returns filed for Wal-Mart Real Estate Business Trust, a real estate investment trust, and Wal-Mart Property Co. During this period Wal-Mart was the sole owner of Wal-Mart Property Co., which in turn owned the majority of the shares of Wal-Mart Real Estate.

The state combined the three returns, the suit states, because it contended that the company's income tax return failed to disclose Wal-Mart's "true earnings on its business carried on in the state."

Wal-Mart and Wal-Mart Real Estate had filed separate state income tax returns. Wal-Mart Property didn't file a state income tax return, and Wal-Mart contends it wasn't required to because Wal-Mart Property didn't conduct business in the state.

In its tax return, Wal-Mart deducted rent it paid Wal-Mart Real Estate, which owns or subleases stores to Wal-Mart, but did not pay tax on dividends it received from Wal-Mart Property. The two entities were created in the mid-1990s "as part of a larger company-wide restructuring to more effectively and efficiently manage our business, including our ever-growing real estate portfolio," said Wal-Mart spokeswoman Tara Stewart.

Wal-Mart also argues that the state's decision to compute its taxes in the way it did "was motivated in whole or substantial part by the fact that Wal-Mart Property Co. did not do business in North Carolina."

Cummings said that the state, by combining the tax returns of the landlord and tenant, in effect eliminated from Wal-Mart's tax return the rent it paid.

The lawsuit contends that the state determined Wal-Mart's taxable income "in an arbitrary manner, without the guidance of any constitutionally acceptable standard."

The law the state cited as giving it the authority to combine the different returns doesn't permit Wal-Mart or other companies to combine them on their own initiative, said Cummings. Nor does it provide any "guidelines or parameters" for such combinations.

"The key is that the secretary of revenue doesn't have any power to require the payment of this tax," Cummings said. "That statute is invalid as applied."

In the state's motion to dismiss, it argues that "even if the factual allegations of the ... complaint were true, each and every one of plaintiff's claims would fail as a matter of law."

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