Market forces are driving a decade-long train of mergers and acquisitions in the grocery industry that many observers say is only halfway to its destination. One area often overlooked during mergers is how the new organization will achieve the same operational economies of scale with expenses related to state and local tax. State and local taxes and the department leaders that manage them are an important, but often a forgotten part, of the M&A process. In an industry where margins are critical, not including these functions in the M&A process can harm profitability if not handled properly.
Increase in personal property taxes?
Marrying different accounting systems and dealing with additional tax filings in unfamiliar taxing jurisdictions is a complex and time-consuming process that cannot be completed as quickly as a store signage change. Using strategic planning and preparation, a merged or acquired supermarket company can combine these transitions into a single streamlined and cost-efficient system that would not overwhelm the accounting department when the acquiring company suddenly doubles its size. A combined companies’ tax accounting system that takes the best parts of its predecessors’ systems, while implementing advanced computer software to meld the two entities, can equal significant savings when it is time to file annual personal property tax renditions.
By merging the tax and accounting functions of both companies, some advantages that could develop include:
- Leverage scale for tax savings: As a result of the mere size of the newly merged organization, economies of scale will soon exist. Personal property renditions are to be filed, generally, for each location in which the company owns tangible personal property. Upon merger, the newly formed company may have a higher concentration of locations in a given county or taxing jurisdiction. That means the number of jurisdictions in which personal property returns are filed may not increase dramatically, even if the number of locations to file for does; therefore, efficiencies can be added in the return preparation process by using existing processes and procedures to handle the same volume. In addition, when talking with assessors and tax appeals boards, there is a chance to flex the muscle of a company that has grown from a single-store location to a multistore behemoth in that jurisdiction. A multi-location company can be much more persuasive when negotiating with state and local tax officials because they are representing a larger group of consumers, the same individuals who will generate sales taxes and vote in that locale.
- Fixed asset cleansing: Combining the lists of fixed assets for the merging entities, such as store fixtures and equipment, can present an opportunity or an operations disaster. While rebranding changes in signs, color schemes and logos does not seem like a tax issue, remodeling an acquired group of stores often turns personal property assets into disposable relics. Properly writing off and disposing of those assets before consolidated the two systems can ensure accurate personal property assessments and proper taxes are assessed by the state and local governments. A merger provides the much-needed incentive for the internal teams to review and cleanse their existing asset ledgers as the two companies merge systems.
Incentives for consolidation
Redundant stores, overlapping or inefficient distribution networks and in some cases excess manufacturing capacity, may also occur as a result of a merger or acquisition. Companies will need to decide whether to close stores, consolidate or close warehouse and production facilities, or open new facilities to meet the needs of the larger organization. Regardless of the type of decision, companies should consider economic development incentives during planning and due diligence to understand how they could offset project costs, reduce ongoing expenses or impact current decisions.
While considering the impact and potential opportunity for incentives on a specific project, it is critical to understand the needs of not only the company, but also how these align with the goals of the state and local economic development. By aligning the needs of the company with the needs of the region, the availability of incentives can result in a win-win-win situation for state and local economic development agencies, the company, and the public at large. Below are a few items grocers should consider when planning for mergers or acquisitions and pursuing incentives:
- Food deserts: Will closures leave the community with underserved areas? If so, could incentives reducing operating costs, such as property taxes or utility rates, keep the store operating in the location?
- Infrastructure improvements: Are there roadway, access or other infrastructure improvements that could benefit the location?
- Economic impact: What portion of the store’s sales and property taxes flow directly to the local governments and could these funds be available to offset renovations, improvements or expansions if they weren’t being paid as tax?
- Economic development zone: Is the store located in an economic development zone, which allows the company to take advantage of certain tax credits or other incentives?
- Other opportunities and creating leverage: Could the same market be served from a location nearby, but in another taxing jurisdiction? Could these alternatives be used as leverage to identify incentive opportunities?
During the due diligence process of a merger or acquisition, it is important to understand if there were any previously granted incentives or performance agreements. These legacy agreements could become a factor when deciding whether to close or combine store locations or other facilities. Such closings can cause compliance issues and ultimately leave the company vulnerable to a “clawback” of the incentives previously received. An example would include a grocery store that received an incentive based on the location meeting headcount and sales targets over a five-year period with an additional five-year retention period. If, as the result of a merger, the store is closed in year three of the retention period, the company could be subject to the clawback provision of the incentive’s performance agreement. The store would be forced to pay back all or a portion of the funds previously received, thus altering the assumptions used to make the initial closure decision.
Megan Lusby is a senior director in Altus Group’s State & Local Tax practice and specializes in Personal Property Tax consulting and compliance. Contact Megan Lusby at [email protected].
Dave Cockey is a senior manager at Altus Group and specializes in Credit and Incentive negotiations.
