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Fall 2003
Stephen Bercovitch J.D.
Senior Manager, Tax Specialists
As different states compete for business, virtually all allow methods
for manufacturers to reduce business taxes. Manufacturers are especially
desirable because the investment in plants and equipment bolsters
the local economy, supports the real estate market, and creates
jobs. This goes double for "the digital manufacturers" — non-polluting,
cutting-edge enterprises that include photographers, printers, pre-press
shops, graphic artists, software programmers, web site content creators
and updating, web site design, etc.
If your company can choose to deliver a tangible
product such as a computer disk or CD Rom out of state
as the result of its services, this exciting planning tool
is at your fingertips.
Under the income taxes of virtually all states, revenue
from services is earned at the place where the service is
performed, and revenue from sales of property is
derived from the state where the property is delivered
(regardless of where it is manufactured). This means
that profits can often be "allocated" outside of the home
state; yet at the same time may not be taxable in the
state where the client or customer is located (some
states - New Jersey and California for example — have
tax laws that limit this benefit). Uniquely, "the digital
manufacturer" can often choose to deliver its product
on-line (a service) or produce a computer disk or CD
Rom. Anything from films, pre-recorded music,
artwork, photography and computer software, to web
site content, graphics, sound and video products that are
not often thought of as tangible "products," can be
embodied in a tangible media, shipped via common
carrier, and thereby "sold" outside the home state.
In addition to this benefit, the purchase of equipment,
including computer equipment and peripherals, that is
principally used in the production of property, can often qualify for investment credit
treatment and sales tax exemption, thereby saving
additional state business taxes. The details of the equipment leases should be reviewed by
your tax advisor to make sure that leased
equipment qualifies equally for these benefits.
The caveat is a lurking sales tax issue if the company also sends representatives or
employees
to the out-of-state jurisdiction, for
example to provide ongoing software maintenance under a contract; or, to consult with an
advertiser on the graphics and layout of
printed advertising material. In most states, even if a disk, tape, or CD Rom is shipped into
the state by common carrier, the sale of
property, when combined with the regular presence of employees at a client's facility, can
create a sales tax collection obligation not
otherwise present.
As the future unfolds and additional bandwidth on the Internet becomes available, the
tendency
may be to stick with the e-commerce,
online (intangible) delivery model. This may serve inadvertently to locate the revenue of a
business in the home state when that
business could choose otherwise and decrease the total state and local business taxes paid.
Consult closely with knowledgeable tax
advisors when in doubt, because the application of state tax law is as
much in flux as technology is. For digital manufacturers, knowing the
rules of the game and developing a good working relationship with
professionals who understand your business can result in the application
of tax saving tools that depend upon how your business practices are
configured.
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