The Importance of Planning for Non-Income-Based State and Local Taxes

July 2022

BY

Scott SmithManaging Director, National State and Local Tax Technical Leader

Kent DeBruinManager, State and Local Tax

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When talking tax strategy, taxpayers and even some tax practitioners can tend to first focus on federal income taxes, with state income taxes coming in second. Too often, however, other state and local taxes that are not based on income are left out of the conversation altogether, for example, property taxes, sales and use taxes and other indirect taxes. Overlooking these non-income-based taxes can be detrimental for businesses looking to minimize their overall tax burden. There may be several reasons why businesses do not prioritize these other state and local tax liabilities:
  • Compliance and reporting procedures for other types of taxes are often quite different from federal and state income taxes, with different administrative agencies, deadlines, and reporting requirements.
  • Compliance functions concerning property taxes, sales and use taxes and other indirect taxes are often decentralized and handled by local operations or facilities.
  • Some businesses do not have the correct employees or capacity to comply with these taxes, or they outsource these functions, which then become out of sight. To make matter worse for these businesses, the costs associated with implementing a third-party tax solution can be prohibitive.
  • Unfortunately, some taxpayers may ultimately view non-income taxes as simply among the costs of doing business. 
Whatever the reason, other state and local taxes should be considered and planned for in advance, just like income taxes. After all, states and localities consider these taxes extremely important to their fiscal health and budgets. 

Why should businesses be more proactive in planning for indirect state and local taxes? Somewhat surprisingly, property taxes, sales and use taxes, and other indirect taxes such as excise, utility and insurance taxes can be the largest piece of a business’s state and local tax expenditures, far exceeding state and local business income and franchise taxes.
 

Property Taxes

For many businesses, property tax is the largest state and local tax obligation, and one of the largest regular operating expenses incurred, sometimes reaching 40% of total tax spend. Nearly all local taxing jurisdictions, including municipalities, counties, and boards of education, generate tax revenue through the imposition of property tax, which is one of the most substantial sources of local government revenue. The current economic environment further amplifies the need for jurisdictions to address budget deficits. Unlike other taxes, property tax assessments are based on the estimated value of the property and, thus, are subject to varying opinions. Businesses that fail to take a proactive approach in managing their property tax obligations may be missing an opportunity to reduce their tax liability. 

Sales and Use Taxes

An often-overlooked issue for businesses that are not proactive with their sales and other indirect tax compliance and planning stems from the fact that these are transactional taxes frequently collected from the customer. Additionally, the time and costs associated with implementing a proper sales tax solution can be quite burdensome. Some common sales tax issues include:
  • Does the business have nexus in the state?
  • Who is responsible for charging and collecting the tax?
  • Is the transaction taxable or exempt?
  • Does an exemption certificate need to be collected?
  • What are the correct state and local tax rates?
  • What are the compliance and reporting requirements?

On the use tax side, businesses are responsible for calculating and self-remitting use tax on any taxable purchases made where sales tax was not charged. If a business does not have procedures in place to properly calculate use tax, then it is at risk of underreporting. Conversely, some businesses in an effort to be conservative will self-remit use tax on too many purchases. A use tax review can identify both exposures and opportunities for refund claims.
 

Unclaimed Property Liabilities

Although not a tax, unclaimed property liabilities can be significant. States require companies to report and remit various property types that have been unclaimed or dormant for a statutorily prescribed period of time. These include, for example, uncashed or voided payroll or disbursement checks, unused/unredeemed gift certificates, rebates, stocks, dividends and accounts receivable credits. All 50 states and the District of Columbia require holders to file annual unclaimed property returns. Many states even require negative filings (i.e., $0 returns). 

Unfortunately, most holders of unclaimed property do not file the required reports.  Moreover, and if not careful, businesses may write-off unclaimed property, leaving themselves exposed for amounts owed to the state plus underreporting penalties and interest. Additionally, the compliance aspects of unclaimed property, along with the statute of limitations, can be vastly different from taxes administered by the states (e.g., each state has different compliance rules and look-back periods ranging largely between 10-15 years). Companies should take proactive steps to manage the potential risks related to unclaimed property and ensure compliance. This could include, for example, feasibility studies, voluntary disclosure filings, policy and procedures implementation and annual compliance process reviews. 

How BDO Can Help

BDO has professionals in the following SALT disciplines:
  • Income, Franchise, and Gross Receipts Tax
  • Sales & Use Tax
  • Sales Tax Automation
  • Property Tax
  • Tax Credits and Incentives
  • Unclaimed Property
  • Excise Tax