How large is Utah's tax bite on business?

HOW LARGE IS UTAH'S TAX BITE ON BUSINESS?

Determining where to locate or expand business operations is a decision that can have a far-reaching impact on the profitability of an enterprise. Many factors must be considered before such an important investment decision is made. The productivity, availability, and cost of labor; the educational system; the quality of life; the proximity to relevant markets and transportation systems; the total tax burden; and the availability of necessary supplies and resources are all important factors that should be weighed in a company's decision-making process. Corporations are discovering that state and local taxes make up a significant portion of their cost of doing business.

The overall tax bite for a business consists of many types of taxes. The most common taxes imposed on business include corporate income/franchise taxes, sales and use taxes, and property taxes. The effect of each of these taxes on the profitability of a certain enterprise will depend on the makeup of the specific business. A firm more heavily invested in property will, of course, have a higher property-tax load than one that is less property intensive.

Corporate Income Tax

State corporate income tax is generally based on a company's net income. Most states begin this calculation with federal taxable income. From this starting point, states require certain modifications, both additions and subtractions, to arrive at state taxable income. The specifics of these adjustments are too extensive to detail here, but it is important to note that they alter the effective tax rate from the nominal or statutory rate printed on the tax form. It is the effective (actual) rate that must be used in comparing tax rates among states with different tax-calculation formulas. The example in table 1 demonstrates the difference in income-tax liability among Utah and five neighboring states given the same facts. As you can see, Utah fares quite well when comparing the actual corporate income-tax burden in this particular situation.

Property Taxes

Property taxes can be a very important factor in any business-expansion decision. This is particularly important for businesses with a disproportionate share of taxable property, when both machinery and real estate would be subject to property taxes.

Property taxes are a major revenue producer for cities and municipalities. Virtually all localities collect property taxes on real estate, with most also taxing personal property. Inventories are generally exempted from property taxes. Valuation and assessments are made at the county or local level, with state governments valuing and administering the taxes on centrally assessed properties such as railroads and utilities.

Property taxes are a function of both assessed value of the property and the applicable mill levy. Because both personal and real property taxes are assessed by cities and counties, tax rates and assessment policies are not uniform throughout a state. It is important for a firm contemplating moving or expanding into a new area to consider the total property-tax burden of that specific area before making any decision. While one jurisdiction may have a lower mill levy, it may assess its property at a higher percentage of fair market value. The resulting tax assessment should be researched, not the separate component parts.

Sales Taxes 

Sales tax is generally imposed on the retail sale of tangible personal property. Because the tax is on retail sales, it does not apply until a sale is made to the ultimate consumer of the product. Typically, a state imposes sales taxes on all sales in which the consumer takes possession of the property within the taxing jurisdiction. Use tax is a complementary tax on property purchased outside of the state but used in the state. To avoid double-taxation, most states have use-tax credits for sales tax already paid on an item in another state.

The impact of sales/use taxes varies among industries. Companies that purchase significant amounts of equipment and supplies for in-house use may find their tax burden increased significantly by the addition of sales and use taxes. On the other hand, because sales taxes are intended to be levied on the ultimate consumer of the goods, companies that resell the product to the consumer generally can pass the sales-tax burden on to the purchaser.

Sales and use tax rates vary only slightly among the states. In addition, many states allow local governments to impose an additional sales/use tax. Table 2 list the general sales and use taxes for Utah and several surrounding states. It also details the range of rates for any additional sales/use tax imposed by local jurisdictions. Note that the state sales tax for Utah is 5 percent, for example, with an additional 1.25 percent in Salt Lake City, resulting in a total sales tax of 6.25 percent.

Utah's total tax burden on business is below the average among its neighboring states. This is attributable to favorable corporate and property taxes. The beneficial tax climate, coupled with Utah's other attributes, make investment in Utah a good economic decision.

TABLE 1: SALES/USE TAX RATES

Assume corporation X has federal taxable income of $1 million. Included in this figure is $150,000 accelerated depreciation (straight line depreciation on the same assets would be $75,000); $20,000 state tax refund from the prior year; and a $200,000 state tax deduction taken on federal return.

State corporate income tax for each of the following states is calculated below:

                         Arizona      Colorado     California
Federal taxable income   $1,000,000   $1,000,000   $1,000,000
State income tax deduc.     200,000      200,000      200,000
Accel. depreciation                                    75,000
State tax refund            (20,000)     (20,000)     (20,000)
State taxable income     $1,180,000   $1,180,000   $1,255,000
Statutory Tax Rate         x 9.3%       x 5.3%(*)      x 9.3%
Total corporate tax        $109,740      $62,390     $116,715
                         Idaho        Oregon       Utah
Federal taxable income   $1,000,000   $1,000,000   $1,000,000
State income tax deduc.     200,000      200,000      200,000
Accel. depreciation                       75,000
State tax refund            (20,000)     (20,000)     (20,000)
State taxable income     $1,180,000   $1,255,000   $1,180,000
Statutory tax rate       x  8.0%       x  6.6%      x  5.0%
Total corporate tax         $94,400      $82,830      $59,000

(*)5 percent x $50,000 5.3 percent x balance

TABLE 2: SALES/USE TAX RATES

             Sales Tax          Use Tax   Range of Rates for
                                          Local Sales Tax
Utah         5%                 5%        1%-1.025%
Arizona      5%                 5%        1.0%
California   6.25%              6.25%     0.5%-1%
Colorado     3%                 3%        0.5%-1%
Idaho        5%                 5%        n/a
Nevada       5.75%              5.75%     0.25%
Oregon       No sales/use tax
Wyoming      3%                 3%        0.5%-1%

Annjanine F. Livsey, JD, CPA, is a senior tax consultant at Deloitte & Touche, Salt Lake City.