Tax strategies for weathering the economic storm.

• Author: Tyler, Scott M.

Economic downturns spur the tax departments of both states and businesses to action. At the same time that states are searching for ways to supplement their declining tax revenues, businesses are formulating strategies to improve their profitability by reducing their tax liabilities.

Businesses often focus on sales and property taxes to reduce their overall tax payments, but in a poor economy companies also must prepare themselves to deal with states' more aggressive pursuit of sales tax revenues. On the positive side, many businesses--and not only manufacturers--can take advantage of external obsolescence caused by the economic crunch to reduce the assessed value of their property and, in turn, their property taxes.

State Efforts to Boost Sales Tax Revenues

With consumers saving more and spending less, most states have been stricken with depressed sales tax revenues. States in need of additional revenue sources generally take two approaches to replenish their coffers. A state might enact new or increased taxes upfront. In today's environment, this primarily takes the form of increased taxes on items that are considered recession-proof, like cigarettes and alcohol. States can also develop new interpretations of existing taxes, which they may or may not announce. A new interpretation typically renders taxable an activity or product that was previously not taxable. Thus, companies that have conducted business in a state for years suddenly find themselves subject to a new tax without any change in the actual (statutory) law.

Indiana, for example, issued a new information bulletin at the end of 2006 that significantly increased the number of extended warranties subject to sales tax. Previously, extended warranties were only taxable if there was a certainty the consumer would receive personal property under the warranty. For instance, an extended warranty for oil changes on a vehicle was taxable because the consumer would receive property like oil and filters; a general repair warranty was not taxable because it was possible that the consumer would not receive any property under the warranty. A consumer is deemed to receive property under a vehicle extended warranty for repairs if the vehicle requires a repair that includes parts. Under the new interpretation, which the state is strictly enforcing, an extended warranty is taxable if there is a reasonable expectation that the consumer will receive personal property under the warranty.

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