Bringing state tax opportunities to business transformation

The pace of business change has been significant over the past few years, and this trend only continues to increase. One of the top takeaways from this year’s PwC CEO survey is that 45% of CEOs think their company won’t be around in 10 years without some significant changes — a five-point increase over last year. However, 38% of CEOs expect the global economy to improve this year. These outlooks are challenging and synergistic where meaningful business changes can improve the outcomes in each scenario.

Significant business changes we are seeing include:

• Diversification of operations across the globe

• Restructuring and business realignment

• Supply chain reinvention

• Cost reduction and strategic growth initiatives

• Digital transformation and adoption of AI

Each of these business change trends presents an opportunity to rethink the state and local tax (SALT) processes, positions and decisions put in place years ago. Considering state and local taxes alongside taking advantage of credits and incentives can help to mitigate risk while increasing ROI — and sometimes even justifying, and sometimes financing, the case for — the business change.

Business operations diversification and realignment

While operational efficiencies and cost savings are often the goal of business operations diversification and realignment initiatives, there are frequently other factors involved. Examples are reinventing the customer experience by changing how the business interacts with its customers or offering new products, services and experiences or introducing new technology to help enhance value and ignite innovation.

Making sure that the tax department is involved at the front end of an operational change is crucial, as there are often tax consequences and opportunities presented by these changes. Further, the diversified or realigned business may raise issues that were once thought not to be applicable to the enterprise — presenting possible tax savings.

As businesses diversify their operations, consolidate or liquidate entities, there are a plethora of state and local income and franchise tax issues to consider. Among other issues, businesses should model out the consequences of federal/state differences (e.g., IRC conformity, PTEP, tax basis, filing methods) and their impact on apportionment, tax base, and resulting liabilities. Considering the impact of these items in tandem with the business realignment, rather than after the fact, can provide the opportunity to build tax efficiency into the resulting business structure.

For sales and use taxes, it is important to understand the potential liabilities that may arise in business realignment and where exemptions may apply. Businesses should understand the new transaction flows, the taxability of new offerings, how to update tax decisions, and comply with new jurisdictions. These items should be considered for domestic sales tax and global VAT compliance.

However, these indirect tax challenges provide opportunities to integrate compliance industry leading practices and automation into the indirect tax function, creating an environment where compliance is streamlined and data insights can produce continual savings. They also provide the opportunity to consider other business operations realignment ideas that the enterprise may not have been considering, such as procurement companies, to further the business’s overall realignment goals.

Supply chain reinvention

Many businesses are exploring changes to their supply chain to help reduce costs and mitigate risks. Another trend that has prompted supply chain changes is the continuing shift of manufacturing operations to various global locations. These trends have driven the creation of Centers of Excellence (CoE) to provide supply chain savings, risk mitigation and flexibility.

From a state and local tax perspective, these arrangements can have varying treatment depending on how they are classified. Do they generate service fees, for example, or are they more aligned with a buy/sell structure? The answer to this question can drive multiple possible state and local tax outcomes.

State tax rules, such as economic nexus, conformity to U.S. federal income tax treaty protection, “starting point” issues in determining taxable income, and combined filing requirements, are all relevant factors in analyzing the overall tax impact of supply chain changes. Depending on the jurisdictions involved, changes like segregating the supply chain function could result in less extraterritorial income being subject to state taxation.

With businesses moving value in response to customer demand, it is important to also consider the impact of such changes on non-income taxes. Franchise, net worth, and business license tax liabilities reflect these changes in value and transaction flow. Likewise, sales and use taxes could pose a potential liability — or, as is often the case, may not be much of an issue if appropriate analysis is undertaken and procedures put in place at the front end of the change. Failing to consider the impact of intercompany transactions or the importance of process issues like exemption certificate documentation, for example, could prove unnecessarily costly.

Next steps for businesses

With the increasing pace of business change, state tax departments have a real opportunity to help drive value while bringing efficiency to their functions.

Understanding your organization’s plans and goals, clearly articulating the tax value proposition and following through with leading ideas and technology solutions are necessary steps to confirm value is unlocked through the state tax function.