United States

COVID-19 state tax challenges for the grocery industry

INSIGHT ARTICLE  | 

Grocers may not be experiencing the same decline in revenue faced by the majority of the economy, but the COVID-19 pandemic is still forcing a period of management and operational changes on the industry. As the pandemic continues, a growing number of American states and cities are enforcing “stay-in-place orders” which permit citizens to leave their homes for select purposes including obtaining essential supplies. Grocery stores and other retailers that sell food and medicine are typically deemed essential businesses. As essential businesses, grocers are experiencing unprecedented consumer demand for food, health and emergency supplies. Grocery stores cannot operate business as usual.

Grocers are focusing on maintaining food supply, keeping customers and employees safe, developing a robust online delivery and pickup platform and bolstering employment to handle the flood of daily shoppers, all while implementing more stringent safety and cleaning practices in stores. Many businesses in the grocery industry are also facing back-office issues as many employees are working remotely. These challenges may result in both state tax opportunities and risks that should be considered.

Employment Tax

Grocers are faced with serious supply and personnel shortages with unprecedented spikes in demand. To maintain a consistent level of service, grocers are hiring hundreds-of-thousands of full-time and temporary workers. As grocers begin to fill these positions, consideration should be given to state programs that assist companies with employee retention and hiring, and other aid during this challenging time. Accurately understanding and effectively managing the tax challenges of a growing payroll is central to success.

Grocers need to make sure they know if they are adding employees or utilizing contractors. Partnerships with foodservice and hospitality companies for temporary workforce reassignment may have payroll tax implications. Grocers should look for ways to use incentives to drive growth, adjust benefits, and reassure safety is their top concern. Many employee benefits follow specific tax rules in order to receive the most beneficial tax treatment. For more information on employment tax, please read our article, Employment tax and employee benefits: 5 issues for growing companies.

Sales and Use Tax

Large grocers are investing in technology to address growing trends of modern consumers. In the post-pandemic world, consumers will likely continue utilizing alternative shopping methods, such as delivery and curb side pick-up. Grocers will need to ensure that both their back-office and consumer-facing technology are able to handle increased online sales volume. Whenever there is new technology or new products, such as restaurant food sold at grocery stores, grocers will likely need to re-examine what items are taxable and what is not taxable based on how the business is adapting during this crisis. Moreover, a review of past purchases can result in significant sales and use tax refunds.

It is important to remember that the sales tax is considered a “trust tax” collected on behalf of the state. Even during times of economic downturn, sales tax charged and collected must be properly and timely remitted to the tax authority. Failure to do so could result in substantial monetary penalties and potential criminal penalties. However, some states have announced delayed filing dates and interest and penalties waivers for late tax payments. For more information on extensions, please read our article, State and local sales tax extensions and relief due to COVID-19.

Credits and Incentives

Unlike other industries and businesses reducing workforces as the economy enters a downturn, grocers are hiring. State and local governments are offering incentives to encourage both job growth and retention. Grocers often overlook available credits and incentives, even during times of economic stability. In addition to retail positions, grocers often have manufacturing, distribution, and back office personnel. Depending on the jurisdiction, the state and local programs may offer tax incentives to hire employees, train employee and encourage innovation. For more information on possible incentives, please read our article, Credits and Incentives: An extra return on your investments.

Income and Franchise Tax

Although grocers may not find themselves with cash needs, monitoring state and local tax extended compliance due dates for filings and payments can be a short-term solution for in-house accounting teams trying to understand the significant tax law changes under the CARES Act. Although the income tax changes are federal changes, due to state conformity to the IRS these policies will impact state filings. For more information on resources to aid in addressing extended filing and payment deadlines, please read our article, State taxing authorities address COVID-19 filing and business changes.

Reviewing prior year filings and identifying refunds for taxes paid in prior periods could create some additional opportunities. For example, Massachusetts and some other jurisdictions may have unique apportionment considerations for different segments of the grocer’s business depending on the company’s structure. For more information on Massachusetts tax benefits, please read our article, Massachusetts retailer and consumer products company tax benefits.

Outsourcing

For large grocery companies, many accounting and finance personnel may be working remotely. Most companies are ill equipped to conduct business remotely for long periods of time. Outsourcing compliance functions, either temporarily or permanently, offers accounting and finance teams additional time to address new and increased responsibilities.

Takeaways

The impact of the COVID-19 pandemic throughout the country has been devastating. Although grocery retailers are one of the few industries experiencing increased revenue, other supply chain and employment needs have current and future tax implications. Addressing state and local tax matters during this period can prevent the rise of state tax exposures and can even result in substantial tax and/or cash savings for the businesses that plan appropriately. RSM’s state and local tax team has the industry experience required to provide comprehensive services to all sectors of the grocery, food and beverage industry at this time.

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