Taxation: A Decisive Factor in Location Selection

Businesses must be aware of several key taxes before selecting a site.

Amy Gerber, Executive Vice President, Jones Lang LaSalle
Matt Jackson, Managing Director, JLL

September 2010

The results of Area Development's 2009 Corporate Survey illustrated the importance of taxation when companies select locations for new operations. Tax exemptions and corporate tax rate were two of the top five site selection factors. Such ratings acknowledge the complexity and variability of the U.S. tax landscape, and the challenges companies face in assessing taxation's effects on projects.

Because every facility has a direct impact on a company's profits and losses, a thorough analysis of taxes is critical before deciding where to locate. Until the tax analysis is complete, a company will not understand the true cost of operating in a given jurisdiction, the difference in costs between jurisdictions, and the benefits economic development incentive programs represent.

For manufacturers, four taxes typically result in the largest financial burdens:
• Income Tax: a tax levied by the federal government, most states, and some local governments on a corporation's net profit.
• Franchise Tax: a tax imposed by state government on corporations chartered in that state. It also applies to limited liability companies and other business entities.
• Sales Tax: a tax charged at the point of purchase for the consumption of certain goods and services.
• Property Tax: a tax assessed on property owned, including real property, personal property, and inventory.

The "big four" often have a significant influence on location decisions, but the tax with the greatest pull on profits and losses depends on a specific project. An operation characterized by significant capital investment in real and personal property, but operating in an industry characterized by lower product margins, will likely find that property tax is most important. A less capital-intensive operation in a high margin industry might find income tax to have the greatest effect. Location selection often involves limiting the tax of greatest negative impact to the project.

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Income Tax
Income tax - also referred to as corporate tax, corporate income tax, or profit tax - is levied on a business's net income (the difference between gross receipts, expenses, and additional write-offs). Income tax calculations are often difficult because of the number of considerations that impact liability. The factors of a corporate income tax analysis include:
• Tax Rate: the nominal rate, expressed as a percent of tax applied to taxable net income, attributable to business done in the state.
• Apportionment Formula: the formula for dividing a multistate corporation's tax base among the states in which it does business.
• Sales Factor Throwback Provision: the rule concerning treatment of income not taxed in another jurisdiction.
• Corporate Tax Structure: the organization of a company's tax entities for state and federal tax purposes.

Tax rates vary widely among states. Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming impose no income tax. New Hampshire limits its state income taxes to only dividends and interest income. Tennessee imposes an excise tax on the net earnings of business done in-state. Texas imposes a Margins Tax - the lower of 70 percent of total business revenue, total revenue of the business minus the cost of goods sold, or total revenue of the business less compensation and benefits. At the other end of the spectrum, California imposes an 8.84 percent corporate net income tax.

Apportionment formulas play a crucial role in determining income tax liability. Generally, states use three formulas to apportion income: a Single Factor apportionment approach (tied to sales), a Three Factor apportionment (applies equal weight to sales, property, and payroll among the states based on the percentage of sales, tangible property, and payroll located within the state as compared to these same factors located everywhere), and a Four Factor apportionment approach (where the sales factor is double weighted).

A single factor apportionment is usually most desirable. For a company with a facility in a single-factor apportionment state, the company only pays corporate income tax on taxable income apportioned to the state, as determined by multiplying taxable income by the sales factor. The sales factor is calculated by dividing sales made by that facility in that state by total sales made in all states. Sales outside that state are not considered in determining state taxable income unless the state has a Throwback Rule. Many states have shifted to a single-factor apportionment formula to stimulate new investment and employment.

Amy Gerber, Executive Vice President, Jones Lang LaSalle
Amy Gerber specializes in the negotiation and implementation of state and local incentives across the country. She has 12 years of experience in analyzing the tax and other cost impacts to a company's profit and loss statement associated with siting a new facility.
Matt Jackson, Managing Director, JLL
Based in Washington, D.C., Matt Jackson is a managing director in the JLL Business Consulting Group. Jackson advises companies on global strategy, cross-border direct investment strategy, location strategy, site selection, and incentives negotiations. He has more than 20 years of experience assisting corporations with complex footprint configuration initiatives that achieve revenue, margin, and innovation objectives. Jackson has conducted more than 200 engagements for corporate clients and negotiated investment agreements for more US$6 billion in direct investment. Jackson holds a BA degree from Macalester College in St. Paul, Minnesota, and an MA degree from University of North Carolina at Charlotte.