Strategies to minimize state and local taxes.

• Author: Genetelli, Richard W.

State and local governments are tightening enforcement of tax laws. Here are six pointers to help keep your corporate tax bill in check.

State and local governments are faced with significant budgetary shortfalls, and many jurisdictions are taking aggressive steps to add to their revenues. A number of state and local governments are increasing the size and the level of experience of their audit staffs to step up their enforcement of tax law. Most states have installed sophisticated computer systems to cross-match information on their taxpayers, and many states have entered into agreements with other states to share information on taxpayers.

As a result, state and local taxes constitute an increasingly greater share of a company's cost of doing business, and companies need to review their operations carefully to make certain they have considered all state and local tax planning opportunities available to them. Here are some general guidelines a company should consider to minimize its state and local taxes. (This article is limited to a discussion of income and franchise taxes. The company should balance these strategies with strategies for other state and local taxes, such as property taxes.)

1. Do not assume that state and local taxes follow established Federal guidelines. Executives often assume that state and local taxes are the stepchild of the Federal tax and that their plans to minimize Federal tax will result in a comparable minimization of state and local taxes. This is not necessarily the case. So the company's first step in developing a strategy is to conduct a thorough review of its tax posture from the perspective of state and local taxes.

2. Consider combined/unitary reporting. If a group of affiliated companies reports on a combined or unitary basis, the companies are treated as though they are a single entity. This method of reporting can produce significant tax savings. Perhaps the greatest advantage is that the company using this method can offset the losses of unprofitable affiliates with the income of those that are profitable. Combined reporting can also create a tax benefit for companies operating in a number of states as a result of the impact it has on the states' apportionment formulas. (The apportionment formula defined by each state determines how a company apportions its income to those states in which it does business. The formulas typically include three factors equally weighted: property, payroll, and receipts.)...