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7 questions to consider when determining your tax base
Determining your tax base for state and local tax purposes is no easy undertaking. Rules change regularly and vary by jurisdiction. They also differ for income, franchise, sales and use, and property tax purposes. State and local tax jurisdictions across the country are continuously fine-tuning their tax policies, subjecting more and different items to tax, while often limiting exemptions. The following are seven key questions to consider regarding your tax base.
- First, you need to determine which tax you are dealing with—income, franchise, sales and use, or property. In some cases, that’s relatively easy, but in others it is not. For example, some companies pay sales taxes when they ought to be paying use taxes. It makes a difference because use tax is based on the cost price versus the sales price of the goods or services in question, and the cost price is usually lower.
- In the case of income taxes, a key question is to what degree the state in question has adopted federal consolidated rules. Most states adopt them completely or at least broadly, but some states deviate, especially in key areas like net operating loss carryforwards and bonus depreciation.
- Have you reworked how to treat property for the IRS’s recent changes to its tangible asset and repairs rules? If so, have you considered how that may affect property taxes at the state and local level?
- How do states treat digital goods and services for both income and sales and use tax purposes? To what extent and how do you have to include any associated income in your tax base? How do you source those sales?
- Have you reviewed the valuations driving your real property tax bills? Valuations are often mere estimates on the part of the property tax assessor based on outdated maps and building permits. Many businesses have successfully reduced their property tax bills by challenging these valuations.
- Have you reviewed your income streams or purchases for allowable exemptions? For example, many states permit broad sales and use tax exemptions for manufacturing equipment and may include activities not traditionally considered manufacturing.
- Don’t forget the personal property tax implications of mobile property, such as trucks or other equipment that spend only a portion of each year in any given jurisdiction.