By Fred Stiftel, firstname.lastname@example.org
Chain store operators are paying higher effective tax rates and lag behind many other industries in capturing the nearly 3,000 U.S. federal, state and local tax credits and incentives
With large workforce populations, consistent employee turnover and multiple locations, retail chain stores are ideally positioned to benefit from the nearly 3,000 US federal, state and local tax credits and incentives currently available. But based on recent economic research that examined the effective tax rates of nearly 6,000 companies across 100 industries, it appears that many retail businesses are failing to take advantage of programs to which they are entitled.
By dividing aggregate reported net income by aggregate taxable income for each industry sector, New York University finance professor Aswath Damodaran calculated that the average effective tax rate across all industries included in his research was 14.07%.
When this 100 industry average is compared with the 97 companies in the study’s four major retail sectors, however, those retail businesses appear to paying significantly higher effective tax rates:
Sector Tax Rate
Retail Stores (43 companies)..........18.42%
Retail Building Supply (7)................27.05%
Retail Automotive (15)....................32.68%
Retail Food (32)...............................30.39%
Although Professor Damodaran’s study did not explore the reasons for the relatively higher tax rates for the retail sector, those businesses appear to be losing out on the more than $60 billion in government incentives that are awarded annually to drive job creation, employee training, capital investment and new business development. And for many retail businesses that stand to gain the most from these programs, that loss is simply a matter of education and effort.
Although statutory and discretionary tax incentives have been around for decades, many companies either have not explored their potential value, or have only scratched the surface of their application. In fact, a relatively small number of companies, regardless of their size or financial sophistication, are benefitting fully from the tax credit and incentive-related benefits to which they are entitled. Industry estimates suggest that fewer than 25% of eligible US businesses participate in the federal government’s Work Opportunity Tax Credit (WOTC) program; and despite an array of lucrative employee tax credit and incentive opportunities offered in all 50 states, only about 10% of participating companies appear to be taking advantage of them properly.
There are multiple ways to lower effective tax rate
Most retail businesses have an opportunity to draw from the billions of dollars available from government agencies to reduce capital costs, operating expense, and federal & state tax liabilities. These financial benefits can be captured on a real-time basis, or retroactively.
Retail businesses most likely to benefit are those that are expanding, relocating, or upgrading facilities; experiencing closures, consolidations, or changes in production or processes; and training or retraining their new and existing workforce. Opportunities are also available for increases or decreases in employment, job relocations, and employees going from contract to permanent status.
The most common types of incentives include:
Hiring credits: Federal and state government incentives are offered to employers, depending on where they do business and their employee demographics. Federal hiring credits include the Work Opportunity Tax Credit Program and Long-Term Family Assistance Program with awards of up to $9,000 per qualified employee. Using only the federal Work Opportunity Tax Credit, a large company that hires 5,000 new employees per year, with 10% of those new hires eligible for the program, can realize $4.5 million in tax credits over a two-year period.
State-Specific Point of Hire (POH) Tax Credits are also available in a growing number of states. Examples include California’s new hire credit of up to $34,000 per eligible employee for the life of the program; and the Louisiana Enterprise Zone Tax Credit Program of $2,500 for each new hire in specific designated areas.
Investment Tax Credits: These tax credits are offered by states to corporations that invest in long term assets such as machinery and equipment.
Sales and Use Tax Refunds, Credits & Exemptions: Many states offer Sales and Use Tax Credits, refunds and exemptions based on certain qualified purchases.
Property Tax Abatements - Exemptions and abatements from taxation on property, both real and personal are offered in most states in certain designated geographic zones.
Customized Training Grants: To maintain and grow the quality of their labor pool, all 50 states offer training grant opportunities for new or existing workers.
Sellable Tax Credits: For companies with Net Operating Losses (NOLs) or for companies that have an unused tax credit inventory, 31 states currently offer programs with opportunities to monetize tax credits through refunds and sales.
Research & Development Tax Credits: Federal and State government agencies offer a wide range of benefits to companies in many industry sectors to incent research and development activity.
Negotiated Incentives: These discretionary programs require negotiation, advance certification, or declaration that the company would not locate to a particular state “but for” these incentives. Most often, they involve job creation, R&D, facilities investment, green initiatives, skills training or site selection.
Program complexity daunting, but worth the effort
There are several reasons why most retail companies fail to take advantage of tax credits & incentives. Notably, corporate tax, finance and HR department managers cite the complexity of the qualifications and the paperwork, or claim that these programs are not worth the effort.
The complexity of tax credit and incentive programs occurs primarily on the state and local levels. All 50 states offer a myriad of programs, with credits driven by a company’s investment levels, headcount and business activity at each location. So for retail companies operating various locations in multiple states, the identification, application process and ongoing management of these programs is no simple task.
Undaunted by the complexity of the process, one of nation’s largest retail outdoor sporting goods chains – with 56 stores in the United States and Canada – recently explored the full range of retroactive and proactive tax credit and incentive opportunities, to yield the following results:
Sporting Goods Retail Chain
Total Savings: $1.60 million
For this retailer and a growing number of other chain store operators, complexity in the range of available federal, state and local tax credits and incentives serves as motivation to explore their economic potential, not as a reason to avoid them or limit participation. With some chain stores reclaiming as much as 25% of their operating costs through government incentives, it’s tough to defend the position that they are not worth the effort.
Fred Stiftel is president and CEO of New Jersey-based Walton Management Services (waltonmanagment.com), which has provided companies with independent tax credits and incentives counsel for more than 30 years. He can be contacted at 732-531-7117 or email@example.com.