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Location Matters: Effective Tax Rates on Retail Operations by State

3 min readBy: Jared Walczak

Due to incentives for job creation and business relocation, new firms often experience lower taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burdens than do their mature counterparts. Often, but not always—and of the firms in our study, this generalization is the least likely to hold true for retail stores. It’s worth exploring why.

In a tax system without incentives for new firms, those companies which are just starting out are actually likely to experience a heavier tax burden, because they’re engaged in more activities subject to taxation. In many states, at least some of the acquisitions a new firm will have to make—furnishings and fixtures, equipment, and the like—will be subject to the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . Similarly, a new firm’s business personal property (subject to property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es in many states) will not have had time to depreciate, and thus the tax liability against that property will be at its apex. Startup costs exist in the world of taxation, too.

That’s why it’s all the more remarkable that many firms experience a lower tax burden in their formative years than they do down the road. Job credits, property tax abatements, and other incentives often more than offset the increased tax costs otherwise associated with getting a business off the ground.

In our Location Matters study, retail stores tell the story of how tax burdens change over time when incentives aren’t generally in play, and thus serve as an intriguing (if imperfect) proxy for the neutrality of state tax codes.

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Unlike the other model firms in our study, retail stores are rarely targeted by economic development incentives. They may be eligible for some incentives with a fairly wide reach, but they’re unlikely to receive the sort of tax preferences available to many of the other firms we analyzed. As such, the states with the lowest tax costs for retail tend to be the states with the most neutral tax structures overall. Many states pick winners and losers. Less likely to be on the winning side, retail does better in states with low taxes across the board.

One of the reasons retail operations are less likely to receive incentives is the perception that states won’t lack for retail stores just because tax burdens are high—that retail stores go where the consumers are, wherever that may be. This is true to a point; the boutiques of Fifth Avenue are unlikely to relocate to Laramie or Sioux Falls because the taxes are lower. But retail is sensitive to effective tax rates. To witness this firsthand, one need only observe the concentrations of shopping plazas just beyond many city limits. Some of this, of course, is to avoid high sales tax on transactions, which are borne by the customer and thus not included in our study. But it’s often to avoid a range of other high taxes as well.

Property taxes are highly significant for retail operations, and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. burdens are often more significant than sales tax rates. The following table shows the highest and lowest tax cost states for mature retail operations:

The Five Lowest Tax Cost States The Five Highest Tax Cost States

1. Wyoming (6.6%)

46. Iowa (21.8%)

2. South Dakota (8.1%)

47. Rhode Island (22.1%)

3. Nevada (9.6%)

48. Pennsylvania (22.9%)

4. North Dakota (10.9%)

49. Minnesota (24.3%)

5. North Carolina (11.9%) 50. New York (26.5%)

To read the full report, click here.

For the rest of the maps in this series, click the following links: Corporate Headquarters, Capital and Labor-Intensive Manufacturing, Call Centers, Research and Development Facilities, Distribution Centers

(note: links will be updated throughout the week as new maps are posted)