Many state and local governments now regularly offer tax credits, abatements and cash or other incentives to businesses willing to invest and create jobs within their borders. Some industries have been more favored than others — for example, manufacturing and technology companies seem to be the most coveted. However, tax incentives have become more prevalent in the retail community over the past three years because of the recession and the relatively slow recovery.
Two recent examples illustrate how tax credits and government incentives can affect site selection and investment opportunities. In the first case, two large retailers announced a merger, and the merged company negotiated a new incentive package for the site of its consolidated headquarters. The merged company chose Florida, the location of one of the merged company’s headquarters and received an incentive package expected to exceed $30 million. In the second example, another national retailer considered moving its corporate offices and garnered significant interest from several states and cities eager to land a large brand name retail headquarters operation. In the end, the retailer did not relocate after receiving more than $100 million in tax and financial incentives to stay put.
These examples demonstrate the opportunities for retailers, but they are somewhat rare occurrences, and most businesses do not routinely consider relocating corporate offices. However, everyday business decisions may also give rise to similar opportunities on a smaller scale. Generally, government incentives may be available for a variety of capital projects such as brick-and-mortar expansion, data centers, warehouses, Internet ventures and even consolidation and entity rationalization initiatives.
In retail, many companies have primarily focused on “statutory” tax credits, and real estate departments have focused on landlord incentives. As a result, many negotiated government incentives are ignored, because many retailers think they are ineligible for such programs. Arming yourself with the knowledge of nonstatutory government incentives can assist you in adding considerable value to your organization. Based on our experience in working with large national retailers, we find the following programs are most commonly used to motivate retail operations.
Sales tax rebates — Sales tax-sharing agreements or rebates can be a substantial opportunity for retailers investing in certain jurisdictions but are available only in Alabama, California, Colorado, Illinois, Missouri and Texas. These agreements allow for a company and the respective governing body, usually municipalities, to share sales tax collections based on a negotiated percentage. The sharing ability is often limited to local or county sales tax, but in certain cases may include state sales tax. The agreement is typically for a defined period of time and allows for a maximum benefit.
Property tax incentives — Local governments imposing property taxes frequently share future property tax revenues with retailers and developers to promote economic development. Incentives often depend on the nature and location of the development, e.g., within enterprise zones and tax increment financing districts. Property tax incentives are managed mostly by local governments, and they allow partial or full reduction in property tax or rebates of property taxes paid on retail projects. These programs may be found in numerous states; however, the subsidy will often go to the landlord. In certain circumstances, the user of the property may have a direct agreement with the local unit of government.
Specialized grants — Localities may provide specialized grants for retail development projects. Typically grants may be used for to enhance the infrastructure or façade, and the benefits may range from $20,000 to $100,000.
Until employment levels rise and government tax receipts return to prerecession levels, the use of tax incentives will continue to be available to retailers that plan ahead and actively seek the opportunities. The aforementioned incentives exemplify the opportunities that retail companies can take as they plan location expansion or retention projects. Sales tax-sharing agreements, property tax incentives and specialized grants are the most advantageous incentives to pursue. For retailers looking to expand into new markets, any one of these incentives may be available as localities continue to seek to enhance and preserve their tax base.
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