Question

Identity and discuss how state and local taxes affects businesses in the state where you live. I live in Minnesota. and how it effects the business.

Write two to three large paragraphs

Answer 1

Taxes are nothing but mandatory contributions to the government who then uses these funds for the upliftment of the economy and people at large by various public welfare activities, etc. It is essential for one to understand the implications of various taxes before starting new business because breach or non-payment of taxes can result in additional cost of interest on delayed payment and penalties. The state and local taxes differ as per the size and location of one’s business. They affect the current and the future cost of operating a business in a particular state. These taxes affect businesses in various ways - one major effect is on the decision making process. For example - before taking any financial decision say, deciding between 2 mutually exclusive events, we consider the present value of inflows and outflows taking in due consideration the tax impact on both the decisions and we go with the event wherein the present value of inflows exceed outflows. Tax forms an important part of this calculation and it can have a decision changing impact. example- one state has higher taxes and other state with other factors being constant has lower taxes, businesses shall go for setting up a factory in the other state even if it would mean that the transportation cost of certain raw materials might go a little up (if the net cost - benefit analysis makes state 2 a better option). States where the net salary to employees (ie salary post tax) is more than other states is seen to have a larger workforce. Property taxes differ from state to state and states with high property taxes are less attractive for start ups, those with lower property taxes are seen to have more start-ups. States with high spending on education are in a way seen to motivate business activities. Also, when a particular project is harmful to the environment and huge environmental taxes are levied on the same in a particular state- individuals there are demotivated from pursuing those projects. Tax credits also have an impact on businesses. Example - if purchasing from a registered dealer shall ensure tax credit, businesses shall buy from those registered dealers and get tax benefit as against buying from unregistered dealer and not getting any tax credit for the purchases made. Also, taxes change the manner in which employees are paid - example - as against ESOP, if employers get deduction as business expense for health insurance premium paid on behalf of the employee, then they will go for that option. Though it cannot be denied that taxes cut down the profits of the businesses and sometimes even increase the cost by way of hiring an employee to look into the taxation matters of the business and to ensure proper compliance of law. Taxes also increase the documentation work for businesses.

Here, in the case under consideration, we are talking about taxes in Minnesota. The State and Local Sales Taxes apply to retail sales of taxable services, tangible personal property or specified digital products made in Minnesota. This is an indirect tax - i.e. businesses collect this tax on retail sales on behalf of the state thereby the duty of collection of this tax is shifted on the businesses (increase of paperwork and interest/penal provisions on business in case of non deposit of this tax to government on time). Another one is, State and Local Use Tax - which applies when you buy, lease or rent taxable items on services used in your business without paying sales tax to the seller. Here, the buyer pays the tax directly to the state. Also, there is Unemployment Insurance Tax - All businesses that pay wages to employees performing covered services in Minnesota are required to register with the Minnesota Unemployment Insurance (UI) Program. However not all those are registered need to pay this tax, it depends on amount and type of employment, amount of wages paid and other situational factors. Another is the property tax which is required to be paid by owners of real property. Excise taxes are levied on alcohol, tobacco and motor fuel. It is to be noted that Minnesota has its own income tax structure which is progressive (so as to ensure equitable distribution of wealth). All these taxes have an impact on the businesses in the various ways as specified in Para 1 above.