Think twice before establishing a warehouse or 3PL in these US states

In choosing a location for your warehouse or 3PL, there are many non-tax factors to consider. You’ll want to consider, in part, proximity to suppliers and customers, the available transportation infrastructure, and the location’s cost and value. Your warehouse or 3PL location shouldn’t be fundamentally driven by tax considerations. But when all other things are equal, the tax consequences of the location you choose should be given significant weight.

As an overview, 44 of the 50 states have a corporate income tax, with rates ranging from 2.5% (North Carolina) to 12% (Iowa). If you have “corporate income tax nexus” with a state (which is different than “sales tax nexus”), then that state can tax you on income fairly apportioned to their state. In most (and a growing number of) states, this apportionment is done solely based on your sales. So, if 10% of your sales are shipped to customers in state X, then state X can claim the right to tax 10% of your nationwide profits. Having stock with a warehouse or 3PL in a state is generally (but not always) sufficient to give rise to corporate income tax nexus with that state.

However, under a federal law known as P.L.86-272, a state has no power to impose a tax on net income derived from interstate commerce against a corporation whose activities in the state consist merely of solicitation of orders for the sale of tangible personal property, which orders are sent outside of the state for approval and are filled by shipment from points outside the state. As a result, one strategy for a company with little to no geographic footprint is to establish a warehouse or 3PL in a state with no or low tax rate and then rely on P.L. 86-272 to insulate the company from state corporate income tax elsewhere.

Enter the “throwback rule,” which has been adopted by approximately 20 states. Under the throwback rule, sales shipped from a 3PL or warehouse in one state to a state where they are not subject to corporate income tax (because the business lacks corporate income tax nexus there) are treated as though they are sales in the state of shipment.

Thus, all other things being equal, you should avoid setting up a warehouse or 3PL in states which both: (1) use the throwback rule; and (2) have higher than average corporate tax rates. This combination poses the risk that sales made nationwide will be taxed at the higher rate where your warehouse or 3PL is located.

So what are the states the meet both criteria? All other things being equal, I’d avoid the following states: Alaska, California, Illinois, Kansas, Massachusetts, New Hampshire, Oregon, Rhode Island, Vermont, and Wisconsin.

If you can find a warehouse or 3PL that meets your needs in one of the states with no corporate income tax (Wyoming, Nevada, Texas, Washington State, South Dakota, and Ohio) or in one of the low tax states with no throwback rule (North Carolina, Indiana, Arizona, South Carolina, Kentucky, or Florida), that’s even better.