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Critical Location Decision Factor #7: Keeping Government’s Hand Out of the Company Coffer

Although corporate tax rates figure more prominently into some location decisions than others, there’s generally an overall tax bite — including property and sales taxes — that needs to be looked at carefully.

Q4 / Fall 2013
This series examines the top-10 site selection factors as decided by the respondents to AD's Q1 Corporate Executive Survey. Labor costs, skills, and a nonunion environment are top of mind; highway access is key; and tax rates and exemptions deserve close scrutiny. Find out what else your company should consider when making its next location/expansion decision.

It’s not a surprise that everyone wants lower taxes, so it makes sense that corporate tax rates are a key factor in site selection decisions. “It goes into every decision,” says Mark Sweeney, senior principal with McCallum Sweeney Consulting. How much it goes into every decision, though, can vary quite a bit, he adds. “If it’s a branch manufacturing facility for a large company and they do have a presence, they would have to pay some, but the burden isn’t particularly onerous. In most projects, it’s not frequently the key.”

Dependence on Profitability
In fact, if it’s early enough in the deployment of a new manufacturing facility or other project with high startup costs, corporate income tax might not be due at all.

“There are lots of deployment projects where the deployment isn’t expected to be profitable for the first several years,” says Darin Buelow, principal and the national leader for Deloitte Consulting’s Real Estate and Location Strategy Practice. “They’re not going to be paying state corporate income taxes while they’re chewing through those net operating losses,” he explains. “If you’re not profitable because of all of the capital expenditures you put in during the early years, it’s not going to be as much of a deciding factor.”

When tax competition leads taxing authorities to create lower, simpler taxes, it’s a good thing… Regardless of the type of tax competition — good or bad — [taxes] do in fact matter to businesses. If they did not, why would states offer such lucrative tax incentive packages to firms, attempting to lure them in? Lyman Stone, Economist, the Tax Foundation’s Center for State Tax Policy On the other hand, the activities at some locations are expected to generate large profits, and in those cases, the corporate tax rate is a much more significant consideration, Buelow says. Further, “corporate income tax rates are much more important when you’re looking country-to-country than when you’re looking just in the U.S.,” he adds. “Then, all of a sudden you have the federal rate involved.”

Type of Corporation
Another important distinction involves the type of corporation. “A lot of small businesses file as S corporations,” Buelow says, which means profits may end up on the individual tax returns of the owners. “They’re going to be paying tax on corporate profits, but at a personal income tax rate.”

C corporations, on the other hand, will owe taxes at the corporate rate, putting that rate more into play in a decision. What about those states that don’t have a corporate income tax at all? It pays to look closely. Ohio, for example, has a commercial activities rate instead, and taxes are collected on all revenues, not just profits. It’s not that one is better than the other, notes Buelow — they’re just different, affecting various companies differently, and Ohio formerly had a corporate income tax.

“Most examples would suggest that Ohio businesses that were in place before and after the switch tend to pay a little bit less than they were.” The bottom line, Buelow advises, “A wise site selection team is going to look at all the taxes in play, such as corporate income tax, property tax, sales tax. The state is going to get its money for operations somewhere.”

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