Though not a tax, a state's apportionment formula can play a role in attracting and retaining manufacturers. Apportionment makes part of a multi-state company's profit subject to state corporate income tax, traditionally weighting property, payroll, and in-state sales equally. Significant in-state manufacturing operations equate to a higher proportion of employees and investment subject to corporate income tax.
Most states, realizing the inherent benefits of attracting and retaining basic manufacturing industries, have converted to an apportionment that double-weights sales (50 percent of total), reducing the influence of employment and investment on corporate income tax. Some have gone a step further to only consider in-state sales. Twelve states have adopted the single-sales apportionment and another four are in the process of converting.
From a business attraction perspective, the rationale is immediately evident. Projects with significant levels of employment and investment will lean toward states that minimize or eliminate the influence of jobs and investment on corporate income tax. Those seeing the greatest benefit have large concentrations of production in a few states and high out-of-state sales. Conversely, companies with low employment and investment but sizeable in-state sales could be hurt. (1.)
Opponents to a single-sales factor argue that it reduces state revenue during a period of historic budget deficits, and unfairly transfers the tax burden to out-of-state firms. Lawmakers continue to weigh the tradeoffs between enhanced competitiveness and deteriorating state finances.
Business location analysis uses multiple filters to narrow down many potential locations into a smaller, more manageable list. The first filter is based on readily available data, and seeks an efficient path to eliminating inappropriate markets. After the first screen, the additional factors applied are subtler and require higher effort to discern the differences between locations within the same region. Sales tax is often included in this second filter.
Retail users have a much tighter geographic focus than other sectors. The right mix of demographics, complementary businesses, and visibility will drive the success of the project. Typically, retailers will first emphasize overall growth and income trends when selecting a metropolitan area for expansion. Within the metropolitan area, retailers enter a world of fragmented jurisdictions and drastically different cost environments.
Sales tax is location-specific, as it often combines state, county, and municipal tax. For consumers, sales tax is levied at the point of purchase for goods and services, whether at a restaurant or big-box store.
From a retailer's point of view, a variety of location choices can serve the same consumer base, especially if the business draws from a large area. Different sales tax levels within a small geographic area make a difference in the final cost to a consumer, and can enhance or jeopardize sales. This can lend an advantage to low-tax sites just outside the boundaries of large metropolitan areas or across county lines. This is particularly true for large-ticket items such as cars.
Even in high-tax areas, a solution in the form of economic incentives is unlikely. Economic developers understand retail is demographics-driven and incentives will not overcome the pull of a better location. Additionally, retail is perceived as low-wage, and has little economic impact in the form of supplier businesses. An exception pertains to destination big-box retail. Some communities have attracted a new generation of destination retailers, like Cabela's or IKEA, to anchor downtown revitalization plans or establish a new area. These tend to attract buyers from a large geography and have a larger economic impact than the typical retail project.
This issue is not limited to attracting retail customers. Sales tax rates affect businesses making large or frequent capital purchases. Data centers or capital-intensive manufacturers often seek and obtain exemptions from sales tax due to perceived economic benefit to the community. Exemptions can be granted on the property's use or by crossing investment and employment thresholds. Regardless of industry sector, determining the scale of purchases eligible for exemption is a critical step when evaluating locations.
Best Practice Location Selection
In general, the drag of a specific tax will not override a strong location's ample labor pool, transportation access, customer base, or other assets. Even locations with serious tax disadvantages can be ideal for companies if the location offers access to these key inputs.
Locations near one or more borders are an exception. These are much more susceptible to scrutiny because tax rates and policies are the sole differentiator between markets with identical labor, resources, and access. On an otherwise level playing field, an enhanced tax environment could push a company over a line.
In response to this, economic developers and lawmakers create incentives that exempt targeted industries or provide credits to lessen tax liability.
Nationwide, communities target a remarkably similar list of industries, offering incentives for emerging industries such as clean energy and biotech. In addition to the usual list, smaller niche industries are now being targeted. For example, Louisiana's Digital Media Incentive promises to reduce the cost of doing business for qualifying gaming and animation companies. A thorough examination of applicable incentives can identify areas of the country aggressively pursuing niche industries.
The best way to avoid getting stuck in a tough tax environment is to consider the elements of your operation and prepare an actual tax estimate to calculate the total cost of doing business in each location. A genuine assessment of a company's needs and a careful balancing of locational attributes will cut through the rhetoric and identify a location that best matches the needs of a company.
1. McKenna, Jon, ed. "Winners, Losers When States Tilt Apportionment Toward Sales." Tax Incentives Alert, Vol. 9, Number 11, November 2010