Several companies have indicated their intent to invest in domestic manufacturing including Apple, NVIDIA, J&J, Roche. There are several state and local tax considerations in deciding where to select a location for a warehouse, factory, production facility, 3PL or distribution center. These considerations include income/franchise, sales/use and property taxes. Here are several state and local tax and non-tax considerations to think about before selecting the best location for your operations.
State and Local Income/Franchise Tax Considerations
State and Local tax considerations when selecting a location for business operations include:
- Effect on P.L. 86-272 protection:P.L. 86-272 is a Federal Law that prohibits states from imposing a tax based on net income when a business’ sole connection to the state is the solicitation for the sale of tangible personal property and the order is accepted and fulfilled from a location outside the state. Having a physical location and storing inventory in a state will break P.L. 86-272 protection. A taxpayer that has historically claimed exemption from state income taxes under P.L. 86-272 may want to limit its locations so it may continue to claim protection from state income taxes under P.L. 86-272.
- State Throwback Rules: Companies that traditionally claim P.L. 86-272 protection may also seek to avoid warehouse and distribution locations in states that impose a “Throwback Rule”. While tangible property sales are generally sourced to their destination, if the business is not subject to income tax in the destination state, states with a throwback rule will then source the sale to the inventory’s origin. This rule could potentially create 100% sales apportionment in the warehouse or distribution facility state.
- Single Factor Sales Apportionment: By investing in facilities, purchasing FF&E, storing inventory in a state, and hiring employees, a business may increase its state tax burden by increasing its property and payroll in the state if the state includes a property and payroll factor in the computation of the apportionment formula. As such, businesses may wish to focus on warehouse and distribution locations in states that use single-factor sales apportionment.
Sales and Use Taxes
Businesses may be required to pay sales taxes on their purchases unless the state grants an exemption. All states will grant a sale for resale exemption on the purchase of raw materials and/or products that are incorporated into inventory. Many states also have manufacturing exemptions that will exempt machinery used to convert materials into inventory. However, some state manufacturing exemptions are broader than others. While a state may have a manufacturing exemption, it may not cover items such as replacement parts, lubricants, or electricity used to power machinery. Manufacturers need analyze the how a state’s manufacturing exemption will affect production costs.
Real Property Taxes
Warehouses and distribution centers are subject to property tax. The property tax burden on a warehouse can vary depending on numerous factors, including location, size, age and condition. Real property tax rates between jurisdictions can vary widely, and businesses should do their diligence on how much real property tax they can expect to pay in a particular location.
Tangible Personal Property Tax
Many localities impose Tangible Personal Property Tax (“TPP Tax”) on tangible property in the jurisdiction. While some TPP taxes exempt inventory, others include inventory in the tax base. TPP taxes are based on the value of the business’ tangible property in the jurisdiction on the assessment date. Before selecting a warehouse and facility location, businesses should research whether they will incur TPP taxes at the location, whether inventory is included in the tax base, and explore ways to manage TPP Tax costs (e.g., minimize inventory purchases close to the assessment date).
Tax Incentives and Credits
Production, warehouse and distribution centers may be eligible for tax incentives or credits from state and local governments. These incentives and credits are designed to encourage businesses to invest in their state or locality. Incentives may include tax breaks, grants and other financial benefits. In some cases, facilities may also be eligible for property tax abatements. Many state and local tax incentives need to be negotiated prior to signing a lease or purchase agreement. Once a lease or purchase agreement is signed, there is no longer a need for state and local governments to incentivize businesses to locate operations in the state.
Non-Tax Considerations
Before considering the state tax burden on a particular location, businesses should also explore non-tax costs, including, but not limited to:
- Real estate
- Logistics/Transportation
- Labor
A particular market may offer a business a $10K/year in state and local tax savings – but if the labor costs are double, and the shipping costs to major customers are higher, the overall cost of doing business there is higher. In short, do not let the tax tail wag the cash dog.
Before deciding on a location for your operations, it is important to consider the state and local tax burdens created by those decisions.
Contact Us
If you have questions about how to create State and Local Tax (SALT) efficiencies in your supply chain, contact Withum’s State and Local Tax Team.
