Tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods. Tax planning can impact almost every aspect of the supply chain. As such, one of the few ways a company can benchmark its operational tax profile is to look at the economic efficiency of its supply chain.
Further, unless a holistic approach is adopted, supply-chain-related tax savings will often be left on the table. Below is a discussion of some of the areas, by function, where savings might lie.
From a tax perspective, ownership of the transaction (i.e. the ability to determine the amount, subject matter and jurisdiction) of taxation is the single most crucial function to own. Ownership of this function will allow the taxpayer, not its vendors, to determine the subject matter of the transaction (services, intangible or tangible personal property), the value of each component (if it is a bundled transaction) and the appropriate jurisdiction to impose tax. This is critically important because each of these factors determine the level of tax the company will pay. Specifically:
- In many states, intangible assets are not subject to property tax. As such, warranty cost included in and capitalized on as a part of certain asset purchases will unnecessarily increase a company's property tax base;
- In several states, software electronically downloaded is not subject to sales tax. The ability to facilitate this type of delivery to the ultimate end-user may determine whether or not the software is subject to sales tax;
- Many companies often disconnect vendor volume or contract inducement payments from the purchase of the underlying tangible personal property. As such, they overstate income, sales or property tax values of such assets;
- The ability to value the importance of this function within the organization and charge related entities for its services may produce a more state income tax-efficient profile.
- Planning pertaining to the importations of goods can often lead to a reduction in the customs and duties paid..
- In situations with rapid vendor turnover, it's important to manage the related escheat (unclaimed property) exposure.
Further, owning the tax-determination piece of a transaction allows companies to reduce the exposure created by mis-compliance.
For many companies, brand management is the essential value driver of the organization. The ability to control the look and feel of the customer experience is essential to maintaining the company's position within the marketplace. The tax implications of branding include:
- The determination within the supply chain of when goods are branded and therefore where the value is added. This, in part, determines the situs of taxability and the value of the goods for income and property tax purposes.
- The ability to license and protect intellectual property associated with the brand, such as copyrights, patents, trademarks and trade names, will often impact the jurisdiction of income taxation.;
- The ability to attach the value of certain intellectual property may impact the customs and duties charges on the importation of products.
- The situs of where such intellectual property is held will impact the tax costs of dispositions when a business unit, and its related intellectual property, is sold.
Merchandising and Marketing
The merchandising function determines what merchandise is carried and where such merchandise is displayed. Often, it also determines the overall store layout or design. These are critical factors in retail operations, as convenience and functionality are essential in retaining customers in today's fast-paced society.
There are many tax implications, including:
- The property tax implications of the capitalization of site selection and store design costs; and
- The state income tax implications of valuing and properly sourcing the services associated with the merchandising and marketing functions.
The structure of a company's internal financing can also impact its overall tax profile.
- The capital structure of a legal entity can often impact its franchise tax profile.
- Efficient internal leveraging can, in some jurisdictions, serve to reduce an operation's state income taxes.