CORPORATIONS WITH TWO OR MORE FACILITIES
If you operate more than one facility, you'll want to think about two strategies when it comes to state taxes. One is how to offset profitable operations with loss operations, whether within a single state or among states. The other is how to move income from high-tax to low-tax states.
The way to accomplish both goals may be to combine the income of your various operations on state returns. While you may already be doing something similar on your federal consolidated return, the issues involved for state taxes are different. Your ability to submit combined state returns depends on how your operations are organized. If they are set up as unrelated corporations, you may not be able to file combined returns. This is a gray area of the law, however, and is worth investigating. Each state has its own rules on whether separate corporations can be considered "unitary" businesses for tax purposes. (The factors usually considered include common ownership of a majority of each corporation's stock and integrated functions such as intercompany transactions and central administration.) Both unitary businesses and corporations with several divisions can combine income (including losses) on state returns.
Let's say, for example, that you have two corporations: Corporation A is making a good income; Corporation B is losing money. If you report the income separately, you'll be subject to a higher tax rate on Corporation A than if, by combining the two, you offset that income with the losses from Corporation B. This is also true if your two operations are in two states. Provided you qualify as a unitary business -- or are organized as one corporation with separate divisions -- the combined net income of both operations is apportioned to each state by a statutory formula (usually based on the ratio of property, payroll, and sales in that state to the total of those factors). The income of the more successful division or operation would be offset by the losses of the other, and the combined state taxes would be less than if the operations had reported separately.
To take another example, suppose you have operations in a state with a low tax rate, and additional operations in a state with a high tax rate. If the operation in the high-tax state is more profitable (in terms of the property, payroll, and sales in that state) than the operation in the low-tax state, combined reporting in the high-tax state will educe overall taxes. In a situation like this, since laws vary from state to state, you should check into the legality of filing a combined report in the high-tax state and reporting income separately in the low-tax state, the best of all state-tax reporting worlds.
If you are a company owner who has acquired other corporations, you might want to check out your eligibility to be deemed a unitary business -- or you might even consider merging the corporations -- to take advantage of combined reporting. Obviously, your first step is to take a look at the long-range numbers to determine what your potential savings might be (and to check out other consequences, including federal taxes, of any reorganization).
PROPERTY IN EXCHANGE FOR STOCK
In a number of states, if you contribute personal tangible property -- a piece of machinery, for example -- to your corporation in exchange for stock, it is exempt from sales tax. Other states, however, exempt such contributions only during the initial incorporation. In subsequent transactions, the corporation has to pay a sales tax. If that's the situation in your state, and depending on how the numbers work out, you might want to establish a new corporation to receive the new property -- which would be exempt from the tax -- and then merge the new corporation into the old.
PURCHASE OF MAJOR ASSETS
As most business owners know, certain components, ingredients, and machinery are often exempt from state sales and use taxes. You may not be aware, however, that certain other items are also often exempt -- but only if their purchase price is stated separately from taxable items. Many states, for example, while taxing computer hardware, exempt sales of custom-made computer software, delivery charges, and training fees. If you live in one of those states, you can save money when you purchase a major computer system by specifying in the contract and in the invoices the price of each service and item.
MERGERS AND ACQUISITIONS
Mergers and acquisitions that are tax free for federal income-tax purposes are not always exempt from state sales and use taxes. Some states, for example, impose a tax on the sale of one corporation's assets to another. Sales and use taxes vary widely from state to state, and in some they can add up in merger or acquisition activity. Decide ahead of time which party will be liable for their payment.