6 Strategies to Reduce State and Local Tax Liability

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Property taxes, sales and use taxes and other indirect taxes often make up the largest percentage of a business’s state and local tax expenditure. Businesses that operate across multiple states might take a less strategic approach to state and local tax planning because deadlines, as well as compliance and reporting procedures, vary from state to state. But for companies willing to navigate this complexity, specific tax planning strategies can result in large savings. When considering total tax liability – that is, the combined amount of taxes owed across local, state, federal and even international jurisdictions – reducing one’s state tax liability can make a significant dent in total tax liability.??

In this month’s newsletter, we’ll explore six strategies to reduce state and local tax liability.??

Have a question about your business’s tax strategy? Get in touch with me at [email protected].?

?Now, let’s Talk Tax.?

?1.??????Automate sales tax and other indirect tax compliance?

Businesses might not consider sales tax and other indirect taxes when thinking about their total tax liabilities because these taxes are collected from the customer and remitted to the government. But in the event of a sales tax compliance error, the customer is not going to pay the difference, so the business is ultimately liable for the tax.??

Fortunately, the right procedures, systems and planning can reduce or eliminate reporting and collection errors, thereby minimizing liabilities caused by sales tax errors. Tax automation software can calculate the correct sales tax rate for hundreds of jurisdictions and account for frequent changes in rates. It can also integrate with a company’s ERP, e-commerce system and third-party tax software to ensure the correct tax is collected.??

2.??????Benefit from a use tax review?

Businesses that do not have procedures in place to properly calculate and remit use tax are at risk of underreporting, fines for which vary from state to state. However, some businesses are conservative and over-remit.

Additionally, calculating use tax can be complicated if an item is used in multiple jurisdictions, or if the company initially ships an item to one location and stores it there temporarily, then ships it to a new location. And while some transactions might be exempt from use tax, state rules vary.??

A comprehensive use tax review can identify exposures, as well as opportunities for refund claims and exemptions. It can also uncover ways to automate and streamline necessary processes. Finally, a use tax review can be especially advantageous for businesses that lack centralized oversight or accounting systems to track the appropriate data.??

3.??????Consider state tax credits and incentives?

Statutory state tax credits and incentives are available to all companies that qualify under the legal requirements. Conducting a strategic review for statutory state tax credits can reveal opportunities. For example, a credit review could reveal that a business is eligible for a state R&D tax credit but lacks the appropriate documentation to support the credit.??

Conversely, negotiated credits are not awarded to all qualifying companies; rather, local authorities determine which applicants will receive credits based on the economic benefits (such as job creation, job retention and capital investment) the recipient will bring to the area. Conducting an economic impact analysis can prepare a business to negotiate the best possible credit and incentive package with economic development agencies. BDO’s negotiated credits and incentives services can help.???

4.??????Tap into valuation appeals??

Because property taxes are often a business’s largest state and local tax obligation, reducing those taxes can provide significant savings, especially during a business slowdown. To avoid excessive property tax liabilities, businesses need to ensure their properties are not overvalued. The period of property assessment varies by jurisdiction, with each considering various opinions when determining a property’s value. An organization might be able to challenge assessments within the real estate appeal window and thus reduce its property tax liability.??

5.??????Evaluate apportionment methods?

When apportioning income to multiple states, using a uniform method can lead to paying too much or too little tax in some states. While most states apportion based on sales, there are exceptions and other methods of apportionment. Segregating and analyzing each revenue stream by state can help determine the correct sourcing and apportionment method.?

6.??????Optimize taxes with advantageous filing methods?

The filing method a business selects plays a role in how much state tax the business pays. States might require a unitary business to report on a unitary combined reporting basis or provide filing option elections. For example, California’s mandatory unitary combined filing allows a “water’s edge” election, which removes affiliated foreign corporations from the combined state report because they are usually not subject to state tax. This could be beneficial if the foreign subsidiary is generating income or expects to generate income soon. Alternatively, a worldwide combined group election could be beneficial if the foreign subsidiary were operating at a loss and expects those circumstances to continue.??

State and local tax planning can save cash??

Scrutinizing your business’s state and local tax obligations can be complex, but the payoff could be worth the effort. A thorough review can lead to new planning strategies that can result in a lower tax bill. It may uncover opportunities for automation, advantageous filing and apportioning methods, or valuable credits and incentives.?

Have questions about how your organization can optimize state and local taxes to reduce your total tax liability? Contact BDO.?