Print this page

HORNE Tax Alert

Strategies for Managing State and Local Taxes

With sales tax receipts declining and budget cuts on the rise, state governments are looking for new sources of revenue. If past economic downturns are any indication, business taxes are sure to be getting a closer look.  Yet companies often forget to consider the impact of state taxes on their bottom line, particularly states other than their home state where the company has significant sales including Internet sales or other operations.  Add up a company's exposure in all those states and the tax expense can be significant.

In the current environment, companies should be actively managing their tax exposure in all jurisdictions by taking the following steps:

• Develop a tax footprint. Companies need to not only understand where they pay taxes, but also how and why these taxes are generated There may be some situations where they can reduce those tax liabilities. A company looking to place sales staff in the Western U.S., for example, may decide that it makes more sense to locate in Nevada, where there is no state income tax, rather than California or Utah, where there is. Companies may also find that they can shift some of their economic activities to low-tax states or eliminate functions or activities that create state and local tax liabilities.
• Look for tax credits and incentives. Some jurisdictions offer incentives such as credits for hiring, capital expenditures, and environmentally friendly initiatives. While it can be difficult for a company doing business in multiple states to stay current, companies that do not take advantage of these programs now may find such opportunities disappearing as states wrestle with their growing fiscal problems.
• Recognize state differences. A technique for reducing tax liabilities in one state may have the opposite effect in another. Some states may consider new taxes-such as a gross receipt tax that produces revenue despite profitability-while others might opt for stricter enforcement.
• Pay attention to documentation. In economic downturns, states traditionally become more aggressive about conducting audits, looking for anyone who is taking an economic benefit out of that state. That means companies need to make sure that their paperwork is in order.

The economic downturn of the early '90s showed that states tend to react quickly to economic declines, but it can take several years for them to fully recover. The states generally lag about two years behind the general economy, meaning that the state search for new revenues may not ease until 2010 or beyond.

For more information on managing your state and local taxes, please contact your HORNE advisor or local HORNE office.