Navigating the Tax Maze

Notwithstanding the recent reduction of the federal corporate tax rate from 35 percent to 21 percent, taxes are and will remain a significant cost of doing business in the United States and around the world.

There are a myriad of taxes that companies pay in the U.S. to federal, state and local governments. They include income taxes, sales taxes, property taxes, excise taxes, employment (payroll) taxes, unemployment insurance taxes, gross receipts taxes, and franchise taxes.

If you think that determining the overall tax exposure for companies can be confusing, you are absolutely correct. The difficulty lies in the fact these sundry taxes vary widely from place to place. 

Complicated is an Understatement

For example, 44 states levy a tax on the net income of corporations.  Of those 44 states, 29 levy a single or flat tax rate, while 15 have multi-bracket or graduated rate structures.  South Dakota and Wyoming have no corporate income tax or other business-related tax.

In Nevada, corporations have a payroll tax, whereas Ohio, Texas and Washington are states with a gross receipts tax. In Delaware, companies pay both a flat corporate income tax and a state-level gross receipts tax.  New Hampshire has an alternative minimum tax in addition to its corporate income tax.

It can get even more complicated at the local level.  For example, St. Louis City imposes a 3 percent earning or occupation tax for employees and employers who work or live there.  A company within the city limits pays 1.5 percent on wages paid to its employees, while the employees pay the other 1.5 percent.

 

Type and Structure Matters

The impact of corporate income and gross receipts taxes will depend largely on the structure of a company and the type of firm involved. Gross receipts taxes typically will have lower statutory rates than corporate income taxes, but they are assessed on a company’s total receipts and not just the net income. 

In short, different types of companies will experience different effective tax rates and therefore will have different tax priorities. Distribution centers, for example, typically will be more concerned about the property taxes, whereas retail establishments will be impacted much more by sales taxes.

Some localities and states levy taxes on personal property or equipment owned by a business. As property taxes can be a large burden, it can have a substantial effect on location decisions by a company.

All states have unemployment insurance programs to finance benefits paid to workers recently unemployed.  Employers pay UI taxes to fund those programs, and rates vary from state to state. 

Two takeaways for companies considering a new location. One, taxes are another cost of doing business and will vary from place to place. (That is nothing new.) Two, navigating the tax maze should be an important factor to be considered in the site selection process.

Here’s Where We Can Help

It is on this second point where BBA can be of great help. Whether it is a new manufacturing facility, distribution center, a headquarters or back office operation, we measure the tax ramifications of these activities and do a comparison check among the finalist communities during our site selection process.

BBA team member Andrew Sloss, our “tax guru,” is well versed in providing our clients with valuable comparative analysis so as to ensure that our clients fully understand the impact that state and local taxes may have on their location decision. 

Andrew also will be analyzing the various tax and financial incentives that economic development organizations typically will offer as an inducement for the company to choose their respective communities. These incentives, which are subject to negotiations, can have a dramatic impact on the total amount of taxes paid.

Most companies view taxes with a jaundiced eye. You can’t live with them because of the burden they seem to place on the business. You can’t live without them, because they fund and provide the necessary government services that a business needs.

BBA helps companies thread the needle in determining better locations when taking taxes into account.

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