- 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.
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.
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.
Each supply chain has a unique structure. A detailed understanding of the operational elements of the supply chain is essential to effective and sustainable tax planning. Further, within tax, a multi-disciplinary approach is required to identify a broad range of potential efficiencies (property, sales and use, franchise, excise, state, and federal income tax).
Supply chains are not static structures. In fact, the structure of supply chains is constantly changing, as are the products they convey. The need for agility in the structure of supply chains leads to ongoing opportunities for tax efficiency or inefficiency, depending upon whether the organization has an operationally focused tax function. Significant investments in technology and processes in an attempt to create a competitive advantage can be squandered if tax is ignored.
About the Author: Giles Sutton, J.D., LL.M. is a partner in the State and Local Tax practice of Grant Thornton LLP in the firm's National Tax Office in Washington, DC. Giles.Sutton@gt.com.