Aspects of the Tax Efficient Supply Chain

Purchasing executives have been trying to squeeze every conceivable dollar out of the supply
chain for several years, especially in the retail industry. They have focused on process
improvements such as total quality management, just in time (JIT), and Six Sigma. We have also
invested heavily in information systems and, more recently, in supplier partnerships. One of the
biggest single costs of running a supply chain, however, has often gone unaddressed: tax.

The reason for this disconnect is that, unlike procurement professionals and information
technology (IT) professionals who work on the operational side of the business (i.e. in profit
centers), tax professionals have typically limited their discussions to a company's financial group
(a cost center).

Corporate tax professionals are typically measured on a non-surprise basis and are seldom
pursued for innovations. Actually, they are motivated to reduce the overhead cost of taxation.
Often, from a strategic point of view, no news is tax department goods news. This has typically
contributed to a disconnect between practical strategic organizational planning and the most
stable type of tax planning— functional tax planning.

Where is Tax Planning Applicable?

Tax planning is applicable for the supply-chain (supplier, retailer, retail channels, company
supply) and for processes leading to the effective management of the supply-chain (purchasing,
electronic data interchange (EDI), merchandising, financing, advertising, etc.). It also applies to
taxes above and below the line. (Above-the-line generally refers to taxes that have an impact on
operating income above the line known as Net Income Before Income Taxes. Over - the-line
costs are expenses used to calculate net operating income before income tax. Operating taxes
include sales and taxation for use, property taxes, license and franchise taxes and excise taxes.
Taxes below-the-line affect taxes on income.)

Taxes cover all aspects of goods identification, procurement, import, carriage, distribution and
sale. Almost every aspect of the supply chain can be affected by tax planning. One of the few
ways a company can assess its tax profile is to examine its supply chain's economic
effectiveness.

In addition, supply chain-related tax savings often remain on the table unless a holistic approach
is taken.

 Procurement
Ownership of the transaction is key as it allows the taxpayer to determine the subject
matter, value of each component, and the appropriate jurisdiction, because the right
balance can minimize tax.
o in many states, intangible assets are not subject to property tax — thus, including
a warranty cost in a capitalized asset unnecessarily increases a company’s
property tax base
 o in many states / jurisdictions, electronically downloaded software is not subject to
sales tax
o disconnecting volume or contract inducement payments from the purchase of the
underlying property can cause sales or property taxes to be overstated
o appropriate planning can often reduce customs and duties
 Brand Management
Brand management also has tax implications.
o the determination of where branding occurs in the supply chain, and thus where
value is added, determines the situs of taxability and the value of goods for
import, export, and tax purposes
o the ability to license and protect IP associated with the brand often impacts the
jurisdiction of income taxation
o the situs of where IP is held impacts the tax costs of dispositions
 Merchandising and Marketing
Critical in retail operations, they carry their own tax implications.
o site selection determines property tax
o capitalization of store design costs have tax implications
 Finance
Finance structuring can have significant tax implications.
o the capital structure of a legal entity can impact its franchise tax profile
o internal leverage can reduce state income taxes in some jurisdictions
 Customer Relationship Management
There are tax implications in building an infrastructure to compile and store customer
information.
o there are state income tax implications wherever such data is stored and
maintained.
o an ability to license and protect IP impacts the jurisdiction of income taxation
o capitalization of CRM software has property tax implications
 Distribution of Asset Management
Distribution management is more than just minimizing logistics costs.
o an incorrect valuation of inventory can lead to higher taxes
o some jurisdictions have sales tax exemptions for transportation equipment in
inter-state commerce
o distribution activities that are not separated into separate legal entities can expose
a company’s major profit centers to unnecessary multi-state income taxation
 Retail
o the employee-intensive nature can lead to process-based payroll tax incompliance
and / or unnecessary over-payments
o state income tax savings can often be found on international distribution assets
o inefficiently designed gift-card programs can cause unnecessary escheatment of
funds
Key Factors in Creating a Competitive Advantage

A competitive advantage exists for those companies that look beyond tax compliance and
towards tax self-determination. Some of the key factors required to achieve this result are
discussed below.

Inter-departmental Coordination
To effectively manage a supply chain from a tax perspective, certain departments must
coordinate their efforts. Tax planning is most effective when tax planners know in advance what
operating functions plan to do (purchase assets, restructure operations or locate facilities), before
they do it. In particular, procurement and distribution operations as well as information
technology (IT) should vet prospective planning, purchases and changes in operations with a
company's tax department. Further, reaching out to the tax department and encouraging them to
focus on reducing operating costs can often produce significant results.

Holistic Approach
Each supply chain has a unique structure. A detailed understanding of the operational elements
of the supply chain is essential to effective and sustainable tax planning. Further, within tax, a
multi-disciplinary approach is required to identify a broad range of potential efficiencies
(property, sales and use, franchise, excise, state, and federal income tax).

Supply chains are not static structures. In fact, the structure of supply chains is constantly
changing, as are the products they convey. The need for agility in the structure of supply chains
leads to ongoing opportunities for tax efficiency or inefficiency, depending upon whether the
organization has an operationally focused tax function. Significant investments in technology
and processes in an attempt to create a competitive advantage can be squandered if tax is
ignored.