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As supply chain impairment has become increasingly problematic in the wake of the COVID-19 pandemic, energy shocks, geopolitical conflicts and other disruptions, many organizations have renewed focus on their supply chain processes and the speed at which they can deliver products to their customers.
While factors such as product cost, location, proximity to market, quality and reliability generally drive decisions related to supply chain, tax ramifications are important too. After all, taxes affect the total landed cost of a product, which factors into profitability. Although foreign taxes and duties and U.S. federal taxes and duties are most commonly considered, the overall state tax impact should not be neglected.
Companies are diversifying their supply chains to dilute the risk of being too reliant either on a small number of suppliers, or suppliers that are too concentrated in select geographic areas. This diversification has affected both foreign and domestic operations, as more organizations consider the safety and stability of suppliers located in the United States and abroad.
Domestically, diversification of the supply chain could affect the location of a company’s workforce, raw materials and supplies, finished goods, and the recharacterization of how transactions are accounted for and defined. In turn, those decisions will affect an organization’s state tax footprint, obligation and opportunity.
For example, consider an organization that locates certain employees and capital in a state to be closer to a specific supplier in which the organization did not previously have a state tax footprint. The following state tax consequences may need to be considered:
- Nexus and state tax filing requirements for state income, sales and use, gross receipt, employment, and property taxes
- Impact or shift regarding state income tax base and value chain optimization
- Choice of entity to be utilized
- Maximizing any available sales tax exemptions, such as manufacturing and research and development exemptions
- Maximizing any available state and local credits and incentives
- Local tax considerations regarding income, gross receipts and property taxes
As companies seek to transform their supply chains and make them more resilient, they need to consider many business and tax issues—and the considerations are dynamic. The impact of supply chain transformation on an organization’s state tax footprint should always be considered as part of an overall business and tax analysis so that decision makers can make informed and effective decisions.
This article was written by RSM US LLP and originally appeared on 2022-09-22.
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