State and Local Tax Areas That Can Offer Cash Flow Opportunities

Cash flow is the lifeblood of a business. During the COVID-19 era, delayed payments from purchasers or customers, unexpected expenses, closings, and other operational restrictions can severely affect it.

One way to improve cash flow is to revisit state and local tax (SALT) obligations and opportunities. While each jurisdiction can vary on approach to taxation, programs, and timing, here are three significant SALT areas for your company to consider.

1. Property Tax

Real estate, inventories, equipment, facilities, offices, storefronts, or other property will generally be assessed tax on a specified taxable value. In the wake of COVID-19, business owners need to consider if the taxable values, which are largely based on productivity, use, and market comparisons, are the same as they were before the economic downturn. If not, will such values bounce back after some return to normalcy or not?  

Opportunities

In most jurisdictions, the taxable value can be reviewed and adjusted to reflect updated values. A tailored review of asset classification, valuation, use, applicable exemptions, and other data used to determine taxable value may help lower current and future property taxes as well as potentially provide for a tax refund.

Next Steps

If you think you can reduce your property tax obligations, here’s a list of considerations:

  • Review real property tax assessment values. If they seem high, consider a personal or real property assessment study to flag potential appeal opportunities and substantiate any reduction in assessed value.
  • Examine fixed asset listings. If the tangible or intangible property is out-of-service, under-utilized, or its usefulness is impacted by trending factors, an asset review will help determine the correct value and taxability of the property.
  • Look for special exemptions and abatements that may have been overlooked. In many jurisdictions, they aren’t openly shared or that lack information on how to apply. For example, a Freeport Exemption can substantially reduce property tax on inventory holdings in certain states. A thorough review of available exemptions and abatement by a knowledgeable property tax practitioner can provide substantial tax savings.

2. Sales and Global Indirect Tax

Prior to the COVID-19 outbreak, business expenditures on new equipment, buildings, software, and other assets were strong.  Many jurisdictions provide exemptions, exclusions, deferrals, or credits for companies that purchase assets for certain uses and locations, including manufacturing, medical, pollution control, designated Enterprise Zones, resale, research and development, aerospace, farming, international purchases, and many others.

When the economy was roaring forward, a number of these exemptions, deferrals, or credits were likely overlooked. With cash flow now the priority for most, companies that have made substantial business purchases can now seek to recoup the sales and global indirect taxes associated with these purchases.

Opportunities

Companies with qualifying expenditures can apply for sales, gross receipts, or value-added tax refunds with their taxing jurisdictions, or in some cases, can accelerate refund timing by filing with their vendor. Reviewing past expenditures and identifying opportunities can result in companies saving material sales and global indirect tax.

Next Steps

  • Consult with your state and local tax advisor on prior expenditures to determine eligibility for refunds, exemptions, and credits.
  • Review the timing of purchases to verify that refund claims are protected against any jurisdictional imposed statute of limitations that would cause eligible refunds to expire.
  • Gather all supporting documentation, including detailed listings of purchases, uses, locations, and other operational facts and file refund claims under the direction of your tax advisor to confirm all opportunities are captured efficiently and effectively.

3. Income Tax

Prior to COVID 19, certain companies have been operating in taxable income and have paid tax to state and local taxing jurisdictions. However, due to COVID-19, many are operating in loss or have had substantial operational change in their business. These events should be evaluated for their impact to collect previously paid tax via refund claims from state and local taxing jurisdictions.

Opportunities

Companies that have paid substantial state income or franchise taxes could be eligible for cash refunds based on several factors. Net operating loss (NOL) carrybacks, business interest limitations (Section 163(j)), nexus, apportionment, cancelation of debt analysis, and research and development expenditures are all areas of opportunity for companies to recoup prior taxes paid or retain a position for future benefits.

Next Steps

  • Evaluate current tax filings and past tax expenditures to target significant opportunities.
  • Explore alternative filing methodologies with your state and local tax advisor based on your company’s operational facts and business activities.
  • Consult with your state and local tax advisor on approach to file and claim tax refund opportunities.

We’re Here to Help

For assistance identifying, preparing for, and pursuing cash flow opportunities please consult your Moss Adams professional.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: