Can the Tax Code Help the Disrupted Retail Industry?

Covid-19 and the social distancing measures that followed have rocked the retail industry, increasing the need for stores to find cash and new ways to engage customers and strengthen supply chains. What if the tax code could help traders adapt to an e-commerce sector that is growing by 33% per year (as in 2020) against 12.5% ​​smaller in the previous five years, while responding to the news consumer demands, who increasingly prioritize connectivity via digital channels?

While online retail has driven retailers to invest in digital transformation over the past 25 years, the past 16 months have accelerated the trend. Now, top performing retailers are taking advantage of rapid consumer and market dynamics and investing heavily in digital transformation to meet demands. The return on investment for them can be significantly improved through effective tax planning, for example by capitalizing on tax incentives offered to organizations that invest in innovation through tax credits for research and experimentation ( D).

Too often, however, companies overlook the tax credits that can be claimed for their commitment to innovation. In a KPMG survey of around 1,000 tax professionals across industries, one in three said they had never applied for state-level R&E credits or incentives, even if ‘he was eligible. Why is it? Because companies have always focused on claiming the merit of highly innovative product and process improvements, as opposed to somewhat less obvious areas of investment, especially in information technology. Often, the methodology for identifying eligible expenditure and supporting documents can be considered more complex than it is in practice. That said, the benefits far outweigh the challenges, and there are plenty of technologies available to help automate the process.

Claiming R&E Credits

The R&E tax credit is attracting attention outside the accounting department, and for good reason. CTOs, VPs, CTOs, and other tech leaders in the retail industry understand that the value of these credits goes beyond just improving the tax rate. workforce of the organization. They know that investing in innovation is vital to stay competitive, improve the “digital gateway” and increase overall business efficiency. They also know that R&E tax credits can boost the overall return on these investments.

Retailers should assess whether and to what extent their investments are eligible for federal and state R&E credits, i.e. they should show that the projects are technological and involve an innovation process among other factors. Costs that may be included in credits include employee salaries, research procurement costs, contractors’ expenses, engineering and design costs, and project costs.

The following are examples of R&E initiatives that could apply to retail:

  • automation of a delivery process
  • development of sustainable and environmentally friendly clothing using biodegradable materials and creation of information technology systems to implement the concept of fast fashion
  • create an application to upload a physical store
  • drone delivery
  • leverage artificial intelligence-based software to optimize supply chains
  • robotic warehouse management
  • develop a blockchain-based product tracking system
  • develop software to be used for internal functions of the organization, including financial management and the execution of day-to-day activities.

Expand credit

As our economy sheds the fallout from the pandemic and social distancing requirements continue to change the way business is conducted, the Biden administration and Congress are considering an extension of the R&E tax credit, as well as possible further tax revisions, which could help stimulate growth and create jobs.

For example, down payments on research credit and an increase in the amount of potentially eligible external research expenditure are actively being considered. Currently, taxpayers can only qualify 65% ​​of external applied research expenditure. In addition, multinational organizations that have software development and research footprints in multiple global jurisdictions can often take advantage of the R&E tax incentives provided by advanced international economies.

We know that being a successful merchandiser means meeting the needs of the consumer in the most convenient way. Investing in digital transformation and leveraging the tax code – and the potentially lucrative credits that can go with it – should be a matter of course for retailers as they adjust to a new business normal that may uncover new opportunities. growth.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Author Info

Gregory Bocchino is a KPMG Partner and a national leader in KPMG’s accounting practices and credit services practice. Ajay Wanchoo is Managing Director of KPMG’s Accounting and Credit Services Division, where he leads the qualitative effort of R&D studies to identify qualified research activities.

Bloomberg Tax Insights articles are written by seasoned practitioners, academics, and policy experts who discuss current tax developments and issues. To contribute, please contact us at TaxInsights@bloombergindustry.com.


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