EPAct Tax Aspects of WalMart's Supplier Sustainability Program

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The EPAct and Alternative Energy Tax Aspects of Wal-Mart’s Supplier Sustainability Program

Wal-Mart requires a huge volume of goods daily to fulfill its third-party supply chain, and requires its suppliers to execute a Sustainable Supplier Assessment as part of its commitment to cost reduction and sustainability. Wal-Mart has three focused goals with this program:

(1) To Produce Zero waste

(2) To be supplied by 100% Renewable Energy and

(3) To sell sustainable products.

Wal-Mart makes it clear that it will "reward those suppliers who have measured impacts and shown progress toward meeting aggressive sustainability goals." Wal-Mart is a critical customer for many companies, large and small, so that Wal-Mart suppliers throughout the country are working through their Wal-Mart sustainably assessments. Wal-Mart suppliers can use a variety of tax savings opportunities to reduce their investment costs as they begin to execute their new sustainability improvements.

Section 179D

Code Sec. 179D, effective January 1, 2006 through December 31,2010, provides an immediate tax deduction of up to $1.80 per square foot for building investments that achieve specified energy cost reductions above ASHRAE 90.1-2001 building energy code standards. A one-time deduction $1.80 per square foot deduction is the maximum tax deduction, but deductions of up to 60 cents per square foot are also available for three types of building systems: lighting, HVAC systems, and the building envelope.

Tax Credits/Cash Grants

Pursuant to Internal Revenue Code Section 48, companies or individuals installing various qualifying alternative energy technology can utilize a variety of 10% and 30% alternative energy tax credits. In addition, sections 1104 and 1603 of the American Recovery & Reinvestment Act of 2009 allow for the taxpayer to take the tax credit in the form of a cash grant so long as their energy retrofitting project qualifies. This energy retrofitting option is exclusively made available for projects that have “begun construction” during 2009 or 2010.

The U.S. Department of Treasury has recently issued guidelines in order to clarify the meaning of construction that has “begun:” there needs to have been actual physical work of a significant nature or, at a minimum, there needs to be a binding contract in place that guarantees the construction of a specified energy property. Also, once a property owner has paid 5% of the total cost of installation of the energy property, the requirements of Section 1603 will generally be satisfied. Property owners desiring to lock in cash grants should review the requirements carefully.

Understanding the 15 Sustainability Supplier Assessment Questions

Wal-Mart has developed 15 Supplier Assessment questions in four categories, which are

(1) Energy and Climate,

(2) Materials Efficiency,

(3) Nature and Resources, and

(4) People and Community

Wal-Mart’s questions by category are as follows:

Energy and Climate: Reducing Energy Costs and Greenhouse Gas Emissions

1. Have you measured your corporate greenhouse gas emissions?

2. Have you opted to report your greenhouse gas emissions to the Carbon Disclosure Project


3. What is your total annual greenhouse gas emissions reported in the most recent year


4. Have you set publicly available greenhouse gas reduction targets? If yes, what are those


Material Efficiency: Reducing Waste and Enhancing Quality

1. If measured, please report the total amount of solid waste generated from the facilities that produce your product(s) for Wal-mart for the most recent year measured.

2. Have you set publicly available solid waste reduction targets? If yes, what are those targets?

3. If measured, please report total water use from facilities that produce your product(s) for Walmart for the most recent year measured.

4. Have you set publicly available water use reduction targets? If yes, what are those targets?

Natural Resources: Producing High Quality, Responsibly Sourced Raw Materials

1. Have you established publicly available sustainability purchasing guidelines for your direct

suppliers that address issues such as environmental compliance, employment practices and

product/ingredient safety?

2. Have you obtained 3rd party certifications for any of the products that you sell to Wal-mart?

People and Community: Ensuring Responsible and Ethical Production

1. Do you know the location of 100 percent of the facilities that produce your product(s)?

2. Before beginning a business relationship with a manufacturing facility, do you evaluate the

quality of, and capacity for, production?

3. Do you have a process for managing social compliance at the manufacturing level?

4. Do you work with your supply base to resolve issues found during social compliance

evaluations and also document specific corrections and improvements?

5. Do you invest in community development activities in the markets you source from and/or

operate within?

The Four Energy and Climate Questions

One of the best techniques to quickly reduce greenhouse gas emissions with a high economic payback coupled with large tax savings is to upgrade facilities to energy efficient lighting. It is particularly important to retrofit any now federally banned metal halide and T-12 lighting to new energy efficient lighting. Many Wal-Mart suppliers have manufacturing facilities and warehouses where these prior generation lighting technologies are still prevalent. The emission reduction computation from energy efficient lighting is straightforward and easy to calculate. HVAC upgrades typically have a high investment cost but often produce the best long term economic return. For non-conditioned (heat only facilities), large EPAct tax deductions are available if the heater upgrade occurs after or concurrently with the energy efficient upgrade lighting upgrade .

Wal-Mart has actually gotten more “hands on” with supplier energy reduction projects in what is called SEEP its "Supplier Energy Efficiency Program." Some of the companies that have participated in this program are: Burlen, Intradeco, Komar, Lone Star Plastics, Marck Recycling, and von Drehle. The Wal-Mart SEEP energy management program frequently utilizes upgrades lighting upgrades and energy efficient upgrade that typically will qualify for the EPAct lighting tax deduction.

Nature and Resources

This set of sustainability nature and resource supplier assessment questions is a sophisticated way to drive sustainability goals through the entire supply chain. Tier 1 suppliers actually supply the final packaged good to be delivered to a retailer like Wal-Mart. The tier 2 supplier provides the processed materials used in making the final product, such as in our example below, a frozen pizza maker will likely need several different suppliers in order to put together the dough, sauce, toppings, and packaging to produce their product. Tiers, in this concept, extend out as far as the supply chain goes, where each lower tier is the direct suppliers to the tier above it. Ordinarily, it is somewhat challenging for Tier 1 suppliers to probe into the affairs of their own vertical suppliers. However, by requesting this step Wal-Mart, makes it easier for the Tier 1 suppliers to do so. Tier 1 supplier should first consider upgrading their own facilities before questioning their lower tier suppliers. Vertical market sustainability inquires sometimes fleshes out sustainability sandwich issues. A sustainability sandwich issue arises when the end user (say Wal-Mart) and the second Tier supplier have achieved higher sustainability including energy efficiency standards that the intermediate Tier 1 supplier.

100% Renewable Energy Goal

This 100% renewable energy goal is very challenging goal and one that Wal-Mart itself is far from accomplishing. Presumably Wal-Mart intends to make some major strides in this area. Logically Wal-Mart couldn't ask its suppliers to seek to do what they haven’t done themselves. Wal-Mart stores typically have very large rooftops that are particularly suitable for solar P.V. On September 2010 Wal-Mart announced a meaningful expansion of thin film solar P.V. projects in California and Arizona . Thin film solar is one of the two major types of solar P.V. material, with crystalline being the other category. Based on current technology, thin film has lower cost but also lower efficiency.

Wal-Mart suppliers in California and New Jersey have an advantage in that their local incentives combined with falling solar prices and 30% Federal tax credits are providing an increasingly better economic return from solar. Wal-Mart family members are founding investors of First Solar a major U.S. solar panel company so Wal-Mart has deep exposure to solar panel technology developments and the continuing decrease in the installed cost of solar. Wal-Mart has a staggering amount of rooftop square footage approaching 500 million square feet.

Suppliers with large HVAC energy users may want to evaluate geothermal systems where both 10% tax credits and EPAct tax incentives are available . Suppliers with large amounts of refrigeration have very large electricity consumption where fuel cells and 30% tax credits are also available.

Wal-Mart Supply Chain Characteristics

The largest categories of Wal-Mart suppliers presumably reflects Wal-Mart’s store layout where two large major sectors are (1) apparel and (2) food products. The supply chains for these two sectors will be different with apparel containing numerous offshore manufacturers and food products characterized by many domestic suppliers, including local suppliers of fresh and organic foods. With the offshore apparel suppliers, ocean shipping is a proportionally large energy user and emissions generator. The domestic food products sectors have high energy building costs, especially for the refrigeration aspects of running their facilities. The hypothetical diagram below presents some of the major suppliers involved in providing a frozen pizza to Wal-Mart or any grocers’ shelf along with sample facilities square footage.


Wal-Mart Local Produce Commitment Program

Wal-Mart has also made a commitment as of October 14, 2010 to increase the amount of produce bought from local farms to increase its fresh food offerings. The company plans to double the percentage of locally grown produce it sells to 9%. Wal-Mart is a $405 billion dollar company where groceries account for roughly half of its revenue. This will equate to a sizeable increase to the number of Wal-Mart suppliers, who if they want to become part of the Wal-Mart supply chain will need to reduce their own energy usage to become a more attractive supplier choice.

The table below presents the EPAct potential tax benefits available to the frozen pizza suppliers presented in the previous diagram.

Wal-Mart Tiered Supplier Chain

Potential Tax Deductions Available for energy Efficient Building Improvements Under Current Legislation


Packaging System Waste Reduction

One of the major focuses with the zero waste supplier initiative is reducing packaging

costs. Product packing cost is major cost category for virtually all Wal-Mart suppliers. In addition to reducing the amount of packaging material utilized major opportunities exist to automate packing systems with new packaging equipment and to improve packaging processes and recycling. In addition to major labor cost reduction opportunities the new packaging systems reduce both production cycle time and often utilize less energy. Although there are no tax incentives for energy efficient packaging equipment some utilities offer custom rebates for these measures. Suppliers with unique products may need to develop customized packing equipment where R & D tax credits may be available. Lastly, many states offer tax credits and incentives for recycling investments.

Integrating Programs

Those Wal-Mart suppliers that act on the four categories of designated supplier initiatives will find themselves much better plat formed for achieving the coveted LEED building status. The tax opportunities with LEED buildings relate to the large number of LEED ratings points involving energy cost reduction and alternative energy. Out of the 69 total LEED rating points, over 20 points relate to energy criteria, with 10 points specifically designed for energy optimization . Additional LEED points are available for alternative energy integration. Also those suppliers from California, Austin, Texas, New York City, and Seattle will improve their benchmarking status in those mandatory energy efficiency benchmarking jurisdictions .


The Wal-Mart Supplier Sustainability program is going to drive multiple sustainability improvements through a deep supply chain. Facilities owners who lease to Wal-Mart suppliers and suppliers who own their own facilities need to understand Wal-Mart’s sustainability goals and use a variety of energy related EPAct Section 179D and alternative energy tax credits and tax savings opportunities to support these goals. Landlords who want to retain existing tenants who supply Wal-Mart or with vacant facilities who want to attract Wal-Mart suppliers also need to understand this supplier strategy and make it their own strategy.


See, Charles Goulding, Jacob Goldman and Joseph Most, Complete Warehouse Tax-Enhanced Energy-Efficient Design, Corp. Bus. Tax’n. Monthly, Aug. 2010, at 11.

See, Press Release Sept. 20, 2010, 8:30 a.m. EDT, Walmart Uses Innovative Thin Film Solar Technology to Increase Renewable Energy Use, <http://www.marketwatch.com/story/walmart-uses-innovative-thin-film-solar-technology-to-increase-renewable-energy-use-2010-09-20>.

See Charles Goulding, Joseph Most and Spencer Marr, The Energy Tax Aspects of Geothermal Heatpumps, to be published by Corp. Bus. Tax’n. Monthly.

See, Charles Goulding, Jacob Goldman and Nicole DiMarino, LEED Building Tax Opportunities, Corp. Bus. Tax’n. Monthly, Jan 2008, at 17.

See, Charles Goulding, Jacob Goldman and Joseph Most, Using EPAct Incentives to Enhance New Mandatory Building Energy Disclosure Requirements, Corp. Bus. Tax’n. Monthly, October 2010, at 11

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