VideoWhen Polo Ralph Lauren's foray into the mail-order catalog business flopped in 1994, it left Joseph Pascucci with a gold-plated — but apparently worthless — education in mail-order tax issues. "A lot of time was spent setting up the business," recalls Pascucci, vice president of taxes. "A lot of research was done from a tax standpoint." The research went abegging, however, as Polo issued one catalog before company management decided to bag it.
Six years later, Pascucci's education is finally paying off. This fall, Polo launches an E-commerce partnership with broadcaster NBC — and Pascucci is point man for tax questions about the cyber startup. "Questions and issues that arise from an E-business are the same as those from the catalog business," he says. "We had a lot of experience with those issues."
Pascucci says Polo's business folks have plenty of inquiries. When it comes to the Internet, many corporate executives seem to be clueless about tax issues. In fact, even some finance managers aren't clear on the topic. Confused by the current congressional moratorium on multiple and discriminatory taxation on E-commerce, some erroneously believe all Internet transactions are tax exempt. "Some sophisticated clients thought the Internet Tax Freedom Act made the Internet tax free, like some cyber-Bermuda," says Jim Gannon, a tax partner at Arthur Andersen (www.arthurandersen.com).
The fact is, Internet taxation involves a lot more than sales tax. Sure, the Web changes the way some companies sell. But it also changes how they procure direct and indirect materials, how they hire employees, and how they receive and deliver services. Analysts and vendors regularly project huge savings for companies that move their business processes online. Those savings translate directly into taxable income. The question is: What tax planning do corporate managers undertake when devising E-commerce strategy — if they plan at all?
To help answer that question, eCFO partnered with the e-tax practice of professional-services firm KPMG LLP. KPMG and eCFO surveyed 100 CFOs and 100 tax directors from among the 2,000 largest companies in the United States. We wanted to know about their E-business initiatives — and the tax strategies, processes, and systems that support them. (To view the results of the entire eCFO/KPMG E-commerce tax survey, see "The e-Transformation of Corporate America" at www.us.kpmg.com.)
Lax = Max Tax
Remarkably, 68 percent of CFOs in the survey said taxes play little or no role in deciding how to structure and where to locate an E-business. More revealing, a third of the tax directors and half the CFOs said E-procurement and other Web-based, internal business processes will have no impact on tax planning. Peter Dangoia, recently the domestic tax manager at Boston-based engineering firm Stone & Webster Inc., says that, while tax planning should play a role in any E-business decision, it's not the main consideration. "Other business concerns would take priority. You don't have the tax tail wagging the dog."
Besides, some CFOs don't believe they get much credit for strategic tax planning — in the virtual or real worlds. Gary Horton, CFO at Reno, Nevada-based Amerco, parent company of U-Haul, says analysts rarely look at actual tax rates. Rather, he says, they look at the effective rate. "They basically pull it off the front of your 10K," he says. "In most cases, the true tax you pay is in the footnotes. But I don't think analysts look at it, and if they do, there isn't much credit given for it."
Given the millions of dollars in savings that many companies project from Net initiatives, a lack of tax planning could prove costly. Says Steve Rainey, partner for e-tax solutions at KPMG's Washington-based national tax practice: "You're talking about more than a third of your savings taken away because taxes don't play a role in that decision."
It appears many CFOs don't know what role taxes play in making E-commerce decisions. In truth, there's a sizable disconnect between finance managers' perception of Web tax policy and that of tax directors. One glaring example: More than half the CFOs surveyed claimed that most or all of their companies' E-business decisions are made on an after-tax basis.
But only 4 percent of tax directors said all E-business decisions are made on an after- tax basis. In fact, four out of ten claimed that no company decisions are made on an after-tax basis. One tax director in the survey felt the communication gap between the CFO and the tax head was deliberate: "They exclude the tax department because they know if they involve it, there might be issues."
Michael Burke, partner in charge of e-tax solutions for KPMG, thinks many companies take the easy way out. "We suspect most organizations don't apply an after-tax rate at all," he notes. "Even those that do are grabbing the effective rate." One reason few companies may apply real, after-tax marginal rates is the difficulty tax directors have obtaining good information. The systems many companies have in place don't help tax managers gather the needed data. And if tax directors can't get the information they need for routine tasks, they're not likely to get much help assessing their companies' E-business strategies. "If you don't have the systems, you need more people," Rainey explains. "If you use a lot of people, you don't have the information in time to make a quick decision. The tax group is left further and further behind."
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