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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 and Matt Jackson, Strategic Consulting, Jones Lang LaSalle (September 2010)

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Slideshow: The “Big Four” Taxes Often Have a Significant Influence on the Location Decision

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Real property is one of the largest components of a project, and can be the amount of investment in real property, or facilities. This figure is even more critical when a project is considering a build-to-suit real estate option. The investment is typically presented to the state and communities on a direct investment basis, representing how much the company intends to spend. For communities that have assessed value requirements, it is important to understand how much of the investment in the building can be deemed personal property, and therefore depreciated.

Personal property can include, furniture, fixtures, equipment, computer hardware, computer software, and telephony. Each Tax Assessor's office will depreciate business personal property based on the depreciation schedules provided by the Assessor's office. For instance, furniture will have a longer life for property tax purposes than computer hardware, which is typically replaced more frequently. It is important to work with the Tax Assessor's office to understand the respective depreciation schedules prior to making an investment.

The effect of assessed value on property tax calculations is illustrated in Figure 4, which is based on the following depreciation schedule for computer equipment:
Year 1 -68 percent
Year 2- 44 percent
Year 3- 28 percent
Year 4- 10 percent
Year 5 - 5 percent

The Assessed Value Calculation above illustrates the need to understand the difference between capital spending and assessed value. While the company may spend $100 million over a three-year period, the assessed values for the taxing authorities (the way the taxing authorities generate their revenue) do not get above $44 million.

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A Variable Landscape
The different methods for how state and local governments generate tax revenue translates into a highly variable tax landscape for companies seeking a location for new operations. The differences can be significant enough to merit a detailed assessment of each major tax. The most important taxes a company must understand in detail include income, franchise, sales and use, and property. The type of taxes and their effects vary according to the nature of the facilities within the state, as well as the company's corporate tax structure. The combined liability associated with such taxes can have a notable impact in a project's profits and losses, and there is never a better time to understand the effects of taxation on a project than before a location decision is made.

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About the Author

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, Strategic Consulting, Jones Lang LaSalle
Matt Jackson has 15 years experience assisting corporations with the global configuration and optimization of corporate operations to achieve revenue, margin, and innovation objectives. He has conducted projects in more than 25 countries around the world.

More articles by Matt Jackson

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How can businesses in states with unfavorable tax requirements limit the negative effects of those burdens?

States that have a burdensome tax environment need to develop and promote a compelling value proposition on other considerations that influence location decisions in efforts to reduce the impact of high taxation in the site selection process. More
- Amy Gerber, Executive Vice President, Jones Lang LaSalle

Of the "big four" taxes, which have the most effect on which investments?

While all investments are subject to the "big four" taxes, some have a greater impact than others. More
- Amy Gerber, Executive Vice President, Jones Lang LaSalle

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