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Case Study: Keeping an Eye on Sales and Property Taxes = Profitable U.S. Venture for UK Company

A UK-based company sought access to U.S. markets to procure materials. They did not intend to manufacture or transform the materials in any way other than possibly repackaging. When Moore Stephens Doeren Mayhew initially met with the company, their plan was to establish a U.S. entity that would purchase the materials and sell them back to a related UK entity who would then sell them to third party customers. 

How Moore Stephens Doeren Mayhew Helped

Moore Stephens Doeren Mayhew assisted with the initial setup by helping the client determine the type of entity and ownership structure that met its needs.  We looked at the U.S. tax implications of different forms of entities, as well as the tax cost of its anticipated related party transactions and distributions to the UK parent company.

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Not only did we address U.S. federal income tax implications, but state and local as well.  One of the things that surprised our client was the property tax on inventory.  The margins of the U.S. company were low, so a tax imposed on the value of property (as opposed to net income) would have a significant impact on the profitability of the U.S. entity.  We assisted the client in obtaining Freeport exemptions, where available, as well as advised them regarding the use of warehouses in foreign-trade zones to help reduce this property tax cost.  Knowing where the company is storing inventory and which states and local jurisdictions impose property tax on inventory has been challenging for them.

In addition to property tax, the company encountered suppliers that charged sales tax to the company.   Moore Stephens Doeren Mayhew assisted the company in obtaining resale exemption certificates, where available, to prevent sales tax charges by their suppliers.  This was required in each state where they made purchases. 

A few years after the initial setup, their business changed and they started selling materials in the U.S.  This required the company to understand the requirements around charging and remitting sales tax on their sales.  Each time they have sales in a new state Moore Stephens Doeren Mayhew assists them in understanding the requirements in that state, such as registering to do business in the state, sales tax registrations, and sales tax return filing requirements.

The Result

Moore Stephens Doeren Mayhew adapts to client needs as their businesses change and evolve.  We continue to work with this client on sales and use tax and property tax issues every time they enter a new jurisdiction. Due to the nature of this client’s business, as a high-volume and low-margin business, the federal income tax planning that we performed at the outset was helpful, but did not end up being their top priority.  Without continued proper planning of these non-income-based local taxes, the U.S. company could easily become an unprofitable venture for the UK parent.

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