State and Local Tax Considerations for Retailers Closing Their Doors

As the retail industry evolves to become more dependent on e-commerce, many traditional brick-and-mortar brands are moving online to internet sales. Subsequently, these retailers are planning to close some, if not all, of their physical locations, including brand names such as The Limited, Macy’s, Kmart and Office Depot.  Late last year, Business Insider reported that consumer equity strategists expected mass store closures in 2017. When retailers reduce the number of physical locations, there are numerous state and local tax considerations to keep in mind.

Sales and Use Taxes
Once a retailer closes its doors, what does it do with overstocked merchandise that can’t be sold at a different location? Often they seek to liquidate the excess inventory. In certain states, the sale or disposition of any tangible personal property (“TPP”) as a result of store closings could result in additional sales tax being due.  However, many jurisdictions have casual or occasional sale exemptions that exempt the sales of TPP that is not normally sold in the regular course of business. There may also be tax filings that are necessary, such as Bulk Sale Notifications. Once the retailer exits a particular jurisdiction, it is important to file final sales and use tax returns in that jurisdiction.

Also, as brick-and-mortar stores move to online sales, they need to update their sales and use tax nexus footprint accounting for both click-through nexus and economic nexus. As retail business has migrated to the internet, states are aggressively seeking to make up their sales tax shortfalls by imposing sales tax on e-commerce transactions (so-called “Amazon taxes”), even though a retailer no longer has physical presence in the state. As a retailer closes physical store locations in favor of increasing its e-commerce business, the now e-retailer may trigger sales and use tax obligations in some unfamiliar states, as well as eliminate sales tax collections in states with historic filings related to physical stores that have now been closed.

Credits and Incentives
Retailers that are eliminating jobs, consolidating distribution centers and closing stores may need to address potential “clawback” provisions if they’ve accepted state and local tax credits or other financial incentives. State and local jurisdictions often offer tax credits and other financial incentives to increase employment, make capital expenditures and help the economy in a particular location. Often, the award of such business incentives is contingent upon a business’s commitment to operate within that location for a specified period of time. If the retailer exits early, it’s possible that the jurisdiction will require the repayment of tax benefits and other incentives for falling short of their commitment.

Although many statutory credits and incentives programs do not encompass the retail industry, there may be opportunities for retailers who are downsizing. For example, retailers may be able to take advantage of hiring and investment credits and incentives if they are creating or expanding a site to aid in consolidation.  In addition, shuttering retailers can also look to some of the state and local workforce agencies and training programs who may be able to help with displaced employees.

Income and Franchise Taxes
There are different considerations for winding down retail operations based on their legal structure, such as pass-through entities and corporations. Issues to be considered may include potential state tax audits, pending refund claims, and tax benefits. Companies that are winding down their operations may have valuable tax attributes such as net operating losses, which should be reviewed prior to the unloading of assets or location and division closings. Be sure to review the tax treatment of the sale of trademarks, inventory, divisions and other assets to determine state taxes and sourcing of gains or losses.

Personal Property Taxes
When a store or distribution center location is shut down in a jurisdiction that imposes a personal property tax, there are opportunities to report the correct value and existence of certain fixed assets. An asset review should be conducted to report the actual assets remaining at the site. Valuation studies may yield reductions in assessed value, which should be appealed to a jurisdiction or negotiated with the taxing authorities.

Final Thoughts
The decision to close or downsize retail operations is often a difficult one, which merits deep consideration of all aspects of the business. Once the choice is made, retailers should guarantee they can exit with minimal disruptions and tax issues by addressing the state and local tax requirements, as well as tax planning considerations.