Tax out for logistics

Tax out for logistics

Inventory taxes, levied on goods stockpiled by shippers, soon may join the colonial duty on British tea in the dustbin of tax history. States are moving to eliminate the tax as they seek to attract logistics and distribution-center jobs.

It can't happen soon enough, logistics executives and tax specialists say.

Anthony Becker, vice chairman of Port Jersey Logistics in Jersey City, N.J., remembers when companies loaded up freight and drove it across state lines one day a year to avoid paying inventory taxes. "It's a silly regulation to enforce," he said. "It will chase freight across state lines. If one state has an inventory tax and the other doesn't, the economy of the state that has the tax will suffer."

Industry groups such as the International Warehouse Logistics Association are working at the state and federal levels to eliminate inventory taxes, which they claim discriminate against warehouse operators.

Phasing out inventory taxes has been "a 30-year trend," said David Brunori, a contributing editor at State Tax Notes, a publication of Tax Analysts, a nonprofit organization in Falls Church, Va. "I would guess that within the next five years nobody will tax inventory," Brunori said.

The reason is that inventory taxes are nearly impossible to assess. "It's futile," said James Papke, emeritus professor of economics and public finance and director of the Center for Tax Policy Studies at Purdue University's Krannert Graduate School of Management.

The economic recovery adds impetus to the drive to eliminate inventory taxes. Some states see logistics and distribution replacing manufacturing as the main source of new jobs. In Indiana, for example, elimination of an inventory tax is part of a strategy to attract logistics business to the state.

Joel Hoiland, president of the IWLA, said eliminating inventory taxes is a question of states offering "fair play" to shippers and warehouse operators. The IWLA is supporting legislation in the House Judiciary Committee to simplify business taxes, particularly inventory taxes. The bill would amend federal law to shield an out-of-state business from a state's business activity taxes, Hoiland said. Without the legislation, IWLA members in a state with an inventory tax operating near a state without such a tax are at a disadvantage, Hoiland said.

Inventory taxes remain on the books in 13 to 15 states, depending on how one defines inventory tax: Alaska, Arkansas, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Ohio, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, Virginia and West Virginia. But "there are proposals in every state to repeal the tax," Brunori said.

Brunori said the inventory tax is a leftover from the 19th century notion of the general property tax, which disappeared "because you couldn't enforce it. You can't tax personal property because people hide it." Inventory "can be moved from one jurisdiction to another, and it is difficult to pin down where it is and who has it. It is a very inefficient tax from an administrative standpoint. There is a lot of evasion," he said.

And it isn't just the movement of inventory that's a problem - it's a question of what is considered inventory, Papke said. "It's a good tax if it's restricted to items the local government is capable of handling; in the colonial days that meant cows and pigs. Today, intellectual property can be considered inventory."

Repeal of such taxes is "a concept whose time has come," said Robert Cline, national director of state and local tax policy economics at Ernst & Young. Papke said similar taxes are also disappearing, and that taxes for business are generally down. "That's true at the federal level as well because the economy seems overly sensitive to job losses, and the politicians are sensitive to job losses," Papke said. "Things are looking up for business owners on the state and local tax front, with few exceptions."

Papke warned that inventory tax reductions may not improve a state's logistics business. "Inventory is a function of market demand for a product," he said. "In the work we've done where we examine a state that has taken and eliminated inventory tax and one that continues, there is no positive correlation between exemptions as measured by employment and investment. There isn't more investment."