Retail Industry Tax Update

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Retail Industry Tax Update

Original Broadcast Date: October 2013

© Grant Thornton LLP. All rights reserved.

Presenters

Giles Sutton
Partner
State and Local Tax
Dallas, Texas

Bill Stickney
Partner
Corporate Tax
Philadelphia, Pa.


2

Guest presenters

Mark Sullivan
Retail Industry Practice Leader
Chicago, Ill.

Jim Wittmer
Regional partner
Strategic Federal Tax Services
Philadelphia, Pa.

3


Learning objectives
• Explain how the newly released repair regulations
impact retailers
• Identify emerging trends retailers face, including
multichannel retailing and global supply chain
issues and explain related tax implications
• Identify valuable tax credits available to retailers
• Explain which operational issues are the biggest
concern to retailers today


4

Agenda

• Tax update for Retail
• Federal legislative update
• Repair Regs: What has changed?


5

Current Retail Operational Issues

• Current Operational Issues facing retailers
– Multichannel issues
– Global supply chain
– Technology driven centralization
– Cost rationalization


6

Current Operational Issues in Retail
Multichannel Issues
• What's the issue?
• 28% growth in online sales in 2012 over 2011.
• Triple-digit year-over-year growth in sales through mobile
and tablet devices.
• 46% of U.S. consumers use their smartphones to check
prices and reviews while shopping at retail stores, then
nearly half buy a less expensive product elsewhere.
• Emergence of "omnichannel" retailing (a unified view of
the brand in the marketplace).


7

Multichannel Issues (continued)
• Why is it important for
retailers?

• How are retailers
responding?

– Retailers can not grow or be
competitive if they depend solely
on in-store retailing.
– Brands get separated from the
in-store experience. 90% of
consumers trust peer
recommendations through social
media, only 14% trust ads.
– When physical stores,
online/social media and mobile
technologies work cohesively
(omnichannel retailing), sales
can skyrocket.

– Analytics solutions
– Social media risk assessment
– Integration: In-store, online and
mobile point of sale (POS)
systems; controls for managing
functions that overlap between
online and in-store; policies for
returns and responding to
customer requests.

8

Global Supply Chain

• Continuously evolving retail supply chain.
• The five "P's" of Powerful weather, Pandemic, Political
instability, Port closures, and Primary sourcing can easily
cause supply chain disruption. (will sequester budget cuts
also become disruptive?)
• Near-shoring/ home-shoring as retailers rethink end-toend supply chain.
• Retailers cutting costs not directly related to the
customer experience, especially in the supply chain.

9

Global Supply Chain (continued)

• Why is it important for
retailers?

• How our retailers
responding?

– Supply chain fraud and theft
of intellectual property in a
global supply chain.
– Smooth operations ,
especially when costs are
being cut .
– Adapting to multichannel
retailing.


– Risk management – financial,
operational, compliance (California
Transparency in Supply Chain Act,
Conflict Minerals, etc.)
– Forensic, Investigative and Dispute
services
– IT selection and implementation -solutions to manage supply chain
risks (data security, supply chain
disruptions/business continuity,
inventory management)
– Tax transfer pricing

10

Technology-based centralization

• Multiple operating systems
• Information flowing from multiple channels (point
of sale, CRM systems, social media, etc.)
• Rapid pace of technology innovation
• Reducing non-customer focused labor in stores


11

Technology-based centralization (continued)
•

Why is it important for retailers?
• Easier reporting and forecasting
• Improved analysis of 'big data' - finding patterns in data
• Stronger controls over various risks, particularly when 3rd party vendors are
involved

How retailers are responding?
• Business intelligence and analytics
• Cloud technology – software as a service (SaaS)
• IT planning and assessment

• Cybersecurity focus
• More powerful POS systems


12

Cost Rationalization
•Changes in consumer demand may drive need to
restructure or build new business models
•Creating operational efficiency so dollars can be
spent on customer-centric strategic priorities
•The uncertain impact of economic factors – rising
fuel costs, consumer sentiment, Affordable Care
Act and other regulatory factors, etc.

13

Cost Rationalization (Cont.)
•

Why is it important for retailers?
• Reducing costs without losing competitive edge or marketplace differentiation
• Need to invest in technology that will propel the company into the future
• Slow growth forecast for 2013

How are retailers responding?
• IT planning and assessment, cloud technology – software as a service(SaaS)
• Focus on financing arrangements/securitizing receivables to lower borrowing
costs
• Restructuring to reduce tax costs
• Seeking performance improvement

• Effectively dealing with health care reform

14

Retail – State Tax Issues

–
–
–
–
–

– Sales tax systems and POS
changes
– Outsourcing
– C&I and purchased credits
– Gross receipts taxes
– Sales tax procurement
structures & cloud
computing


15

Sales taxation of services
Entity rationalization
Leverage Planning
NOL Utilization
Group Reporting Issues

Current Retail SALT Issues
Procurement Structures & Cloud Computing
• Retailers are a large consumers of software and cloud-type
products
– It helps to manage IT costs
• Identifying tax issues and solutions around such
transactions are, and will be, important to the retail
community
• Procurement structures can often help – the objective:
– Owning the tax determinations pertaining to cloud
purchases

16

Entity Rationalization
•
•
•
•

Entity simplification
Supply chain orientation
Off-shore planning
Unitary determinations
– Instant unity (for M&A transactions)
– Treatment of foreign source income
– 80/20
– Water's-edge elections


17

Complexity of Tax Regimes Impacting Retailers
•
•
•
•
•

Extra-Jurisdictional reaches (Chicago/Illinois)
Sales tax holidays
Bag taxes
Food stamp transactions
Gross receipts taxes
– State (CAT, B&O, Delaware, TX Margins)
– Local (San Francisco, Philadelphia, BPOL)
– Local sales taxes (origin vs destination sourcing)
• Reduction in collection allowances
• Transaction taxes should be transparent, fair, easy to administer
and understandable!

18

The Changing Face of Nexus
•

What is the current nexus standard?
– Known nexus standards
• Physical presence (Quill)
• Agency nexus
• Bright line nexus
• "Amazon" agency + bright-line nexus
– New "click-through" nexus regimes in 2013: KS, ME, IA and MO
• KS law broadens the "agency" type relations the will create nexus for a remote
seller including another person (including unrelated 3rd parties) that uses
trademarks, trade names, or service marks in the state similar to those used by
the retailer
– Public contracting laws (KS and IA) – a retailer selling to state agencies, must
register as must their retail affiliates must registers for sales and use tax
– Remote seller notice requirement (KY)
– Unitary nexus (WV) effectively expanding the definition of "retailer engaging in
business in this state" to certain related members of a unitary group


19

The Changing Face of Nexus
• Gift cards
– What if they really don't know where the gift cards are
going (due the use of 3rd part distributors)
– Do gift cards create physical presence nexus?
• Big box, specialty, e-commerce
– What is fairness?
• Big box - cutting deals with states (credits) and local
jurisdictions (incentives)
• Specialty – (de minimis credits)
• E-commerce /small business (just liabilities?)


20

Retail Industry Tax Update Webcast
Agenda



21

Federal Legislative Update

• Section 336(e) Regulations Issued
• IRS Guidance Issued after Supreme Court Strikes Down
DOMA
• Other Items You May Have Missed


22

22

Federal Legislative Update – Section 336(e) Regs.
What is the effect of a Sec. 336(e) election?
Who makes the election?
What is the effective date of the regulations?
See T.D. 9619 for details.


23

Federal Legislative Update – IRS Issues DOMA
Guidance
The Supreme Court held that section 3 of the
Defense of Marriage Act (DOMA) was unconstitutional.
What are the implications?
What did the IRS recently decide?
What should or can employers do?


24

Federal Legislative Updates – Items You May
Have Missed

What happened?
• IRS will no longer issue Section 355 comfort letters
• Deduction denied for costs associated with stock
offering
• IRS cuts refundable corporate AMT credit


25

25

Retail: Current Federal Issues
Federal Tax Credits
• Certain federal tax credits are
applicable and very attractive to
retailers, such as:
– R&D
– IRC Sec. 45B (Restaurant retail)
– IRC Sec. 49O (limited
applicability)


26

Retail: Current Federal Issues
Retail M&A Issues
• There is a fair amount of retail M&A going on
– Buying concepts out of distressed position
– Buying assets
– Buying smaller innovative e-commerce plays
• Tax planning opportunities
– Transaction cost analysis
– Post acquisition integration
– Attribute analysis

27

27

Retail Industry Tax Update Webcast
Agenda



28

What was issued?
• Final regulations under 162 and 263(a)

– Amounts paid to acquire, produce, or improve tangible
property
• Re-proposed regulations under 168
– General asset accounts and disposition of depreciable
property
• IRS and Treasury expect to finalize these regulations
in 2014


Repair regulations: What has changed?

Agenda

• Improvements to tangible property

• Dispositions
• De Minimis
• Materials and supplies
• Effective dates


Improvements to property

General rule

A TP must generally capitalize an amount that IMPROVES a
unit of property ("UOP") if the amount:
(1) Is for a betterment;
(2) Restores the UOP; or
(3) Adapts the UOP to a new or different use.


Highlights

Improvements to real property
Significant changes

New elections

• Replacement of significant portion of a
major component of a building is restoration

• New and revised examples

• Routine maintenance
safe harbor now applies
to buildings
• Safe harbor for buildings
of small taxpayers
• Election to capitalize
repair costs

Issues and opportunities

What's the effect?

• Annual elections need to be considered
each year – not available retroactively
• New examples in the restoration area
provide increased replacement percentages
over old examples
• §263A applies- no plan of rehabilitation

• Safe harbor elections
made each year = no
481(a) adjustment
• Repair or capitalize
changes = 481(a)
adjustment

• Addition of a major component and material
increase in capacity are betterments
• Treatment of removal costs


Highlights

DISPOSITIONS
Significant changes

New elections

• Asset for disposal purposes is no longer building
structure and building components- building is
the asset (eliminates need for general asset
account election)

Partial disposition
election

• Partial disposition election for buildings and
personal property

• Required partial disposition for casualty, tax-free
exchanges and sales

What's the effect?
Awaiting guidance on
availability of retroactive
partial disposition election

• For years starting after 1/1/14, partial disposition election can only be made in
the year disposition occurs- requirement for clients to track each year
• Regs. provide that reasonable methods can be used to determine basis of
assets disposed (i.e. replacement trending, study, allocation methods)

Highlights

DE MINIMIS
Significant changes

New elections

•
•

De Minimis safe harbor

•
•

No ceiling limit or tracking requirement
Safe harbor based on invoice/item price:
– TP w/AFS = $5,000
– TP w/o AFS = $500
Includes transaction costs and other costs of
acquisition (i.e. labor and OH)
If elected, applies to all materials and supplies

What's the effect?
Only applies to
amounts incurred in the
year adopted: no
retroactive adjustment

• Election must be made each year- statement attached to return
• Taxpayers without audited financial statements can now take advantage of
a de minimis deduction
• Written accounting policy must be in place on first day of taxable year to
which election applies
• Amounts not subject to de minimis must meet clear reflection or capitalize

Highlights

MATERIALS AND SUPPLIES
Significant changes

New elections

• Definition now includes
property with acquisition or
production cost of $200 or
less (increased from $100)

Election to capitalize now only applies to
rotable, temporary or emergency spare parts

• Definition of emergency
spare parts

What's the effect?
Final regulations only apply to amounts incurred
on or after 1/1/14, unless early adopt.
No retroactive adjustment

• Clear definition of materials and supplies
• Can elect to deduct under de minimis, applies to all eligible materials and
supplies

Transitional rules

• Revenue procedures expected to be issued late October or
November
• Expected to provide for late partial disposition election for
2012, 2013, and 2014 tax years
• Will provide guidance on changes made under the
temporary regulations


Effective dates

• Final and re-proposed regulations effective for years
beginning on or after January 1, 2014
• TP may choose to apply the final, reproposed, temporary or
any combination thereof for 2012 and 2013
• Transitional relief for elections
in 2012 and 2013


Comments?

Questions?


38

38

Contact

Information

Giles Sutton

Mark Sullivan

Partner
State and Local Tax

Retail Industry Practice
Leader

Giles.Sutton@us.gt.com

Mark.Sullivan@us.gt.com

Bill Stickney

Jim Wittmer

Partner
Corporate Tax

Regional partner
Strategic Federal Tax
Services

William.Stickney@us.gt.com

Jim.Wittmer@us.gt.com

39

Disclaimer
**********************
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the
U.S. Internal Revenue Service, we inform you that any U.S. federal tax advice
contained in this PowerPoint is not intended or written to be used, and cannot be
used, for the purpose of (a) avoiding penalties under the U.S. Internal Revenue Code
or (b) promoting, marketing or recommending to another party any transaction or
matter addressed herein.
**********************
The foregoing slides and any materials accompanying them are educational materials prepared by Grant Thornton LLP and are not
intended as advice directed at any particular party or to a client-specific fact pattern. The information contained in this presentation
provides background information about certain legal and accounting issues and should not be regarded as rendering legal or
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© 2013 Grant Thornton LLP, the U.S. member firm of Grant Thornton International. All rights reserved. Printed in the U.S.A. This
material is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International, Ltd.


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Retail Industry Tax Update

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