The Tax Efficient Supply Chain

It has been said that the ability to learn faster than your competitors is the only truly sustainable competitive advantage. And that's just what those companies that learn to apply tax planning best practices to their supply chain structure are finding...


Customer Relationship Management (CRM)
Increasingly, companies are seeking to manage the data collected from a myriad of contact points with customers. Contact points include data gathered in surveys, interactions with customer service representatives, orders placed online, dealings with warranty personnel and the usage of coupons. This information is critical to companies because it tells them, from a customer perspective, the relevance of their products or services in the marketplace, the effectiveness of their marketing efforts and the efficiency of their delivery system. The tax implications of building the infrastructure to compile and store this data include:

  • Due to the extremely high value of customer data, there are state income tax implications as to where CRM data is stored and maintained.

  • 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.;

  • Property tax implications as to where CRM software is capitalized.

  • Since CRM is a communication-intensive function, a review of the excise tax amounts on telecommunications charges may lead to certain excise tax refunds.

Distribution and Asset Management
In an era of just-in-time replenishment, distribution is a critical function. Efficient management of distribution center (DC) functions and of the related transportation and merchandise handling equipment is a key component of creating a cost-efficient supply chain. There are significant tax impacts on these functions as well, for example:

  • Paying attention to the actual assets employed and special purpose designs of facilities can impact the amount of property taxes paid.

  • For those jurisdictions imposing property taxes on inventory, employing the proper valuation methodology can reduce the holding cost of such assets.

  • In certain jurisdictions there exist sales tax exemptions for transportation equipment used in inter-state commerce.

  • Improper capitalization of cost, such as duplicative site selection costs or the improper characterization of costs as real property as opposed to personal property, can impact property tax assessments.

  • Often, distribution activities, if not segregated into separate legal entities, can cause a company to expose its major profit centers to unnecessary multi-state income taxation.

  • Taking advantage of negotiating with, and sourcing of Internet sales to, local jurisdictions (cities/counties) can reduce the cost acquiring internal use assets.

  • A failure to closely examine inventory handling operations can lead to an overcapitalization of such costs for federal and state income tax purposes.

Retail
Tax also impacts the cost of running retail operations. Certain characteristics make operating retail operations susceptible to tax inefficiency, including:

  • The high turn over in employees can lead to escheat (unclaimed property) exposure.

  • The employee-intensive nature of retail can lead to process-based payroll tax incompliance and, perhaps, the payment of unnecessary payroll taxes.

  • Inefficiently designed gift card programs can often cause unnecessary escheatment of funds.

  • Certain operational structures may reduce the use tax cost of producing and distributing advertising inserts.

  • State income tax planning pertaining to vendor payments negotiated for retail display allowances, cooperative advertising, volume discounts and exclusive carry arrangements may lead to significant savings.

  • Potential state income tax savings may be obtained based on international sales and distribution assets.

  • Review of sales tax systems should be reviewed to reduce the costs of mis-compliance.

Key Factors in Creating a Competitive Advantage

A competitive advantage exists for those companies that look beyond tax compliance and towards tax self determination. Some of the key factors required to achieve this result are discussed below.

Inter-departmental Coordination
To effectively manage a supply chain from a tax perspective, certain departments must coordinate their efforts. Tax planning is most effective when tax planners know in advance what operating functions plan to do (purchase assets, restructure operations or locate facilities), before they do it. In particular, procurement and distribution operations as well as information technology (IT) should vet prospective planning, purchases and changes in operations with a company's tax department. Further, reaching out to the tax department and encouraging them to focus on reducing operating costs can often produce significant results.

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