State taxes

By |  March 5, 2015

Aggregate producers should be prepared for unexpected audits or additional taxes.

The Council on State Taxation (COST), a Washington, D.C., think-tank, recently released the results of a study showing business taxes accounted for 45 percent of all state and local taxes collected. While corporations may not pay a lot of income taxes, they are paying hundreds of millions of dollars in property, severance, sales, employment and other state and local levies. The study found that businesses paid $671 billion in state and local taxes in 2013, up about 4 percent over the previous year – and many state tax levies are on the increase.

Cash-strapped states and local governments are getting aggressive – hiring more collectors, hounding scofflaws and exploiting provisions of their tax laws that haven’t been enforced in years. And don’t forget the increases in the corporate taxes, individual taxes, sales and use taxes, property taxes and unemployment insurance tax that burden businesses of every size. Will you and your crushed stone, sand or gravel business be the next targeted for an audit or new, additional state tax levies?

More than state income taxes

Many states impose a franchise tax as well as an income tax. The franchise tax is usually, based on the property used in the aggregates business. But just because an aggregate producer has sales in another state does not always guarantee that it can apportion some of its income to that state.

In fact, many states subscribe to a so-called “throwback rule.” The theory is, even if an aggregates business has sales in another state, if that state does not tax the income, the income belongs to the business’ home state.

Obviously, not all income is subject to apportionment. Certain items of income such as capital gains on the sale of property are more properly allocated to the state in which the property is located. In general, most states with such a tax usually use the same factor used for allocating income to apportion the franchise tax.

A sand, gravel or crushed stone business owner or manager might keep in mind that in some cases it may make sense to establish a presence in a state just to allocate income or sales outside the aggregates operation’s home state. The higher the home state’s tax rate, and the lower the tax rate in the other state, the more advantageous this strategy becomes.

Property taxes

Despite all of the attention focused on income taxes, it is the bill for the tax on the property owned – or leased by – many aggregates mining businesses that is the biggest expense and the most difficult to manage. According to COST, American businesses shell out more on property taxes than for any other type of state or local taxes.

To the uninitiated, the property tax can seem somewhat mysterious and arbitrary – and beyond the aggregate producer’s control. In its simplest form, the tax is supposed to be based on the “fair market value” (FMV) of the property subject to the tax. This is a straightforward concept when it comes to “normal” types of commercial and industrial properties such as office buildings, retail centers and distribution warehouses.

Fortunately, lowering business property tax bills is both feasible and necessary in today’s economy and can be accomplished with a few simple strategies that have worked in more than 14,000 taxing jurisdictions. The potential for major savings exists in this area because, once reduced, the savings generally remain effective year-after-year.

Unlike most taxes, property taxes are computed by the local government and the taxpayer is usually told only what or how much to pay. Armed with a few facts about the aggregates operation’s property, it is relatively easy for anyone to review the tax assessor’s records for the property. Most tax assessors, elected or not, are eager to cooperate and usually willing to correct any errors detected and brought to their attention.

Ignore ‘use’ tax at your peril

If a resident of a state makes a purchase within his home state, a sales tax is paid at the time of the transaction. Generally, both businesses and individuals are supposed to pay a “use” tax whenever items are purchased without paying the home state’s sales tax and that items are used, given away, stored or consumed in the home state.

Quite simply, a use tax is a type of excise tax levied by numerous state governments. It is assessed upon tangible personal property purchased by a resident of the assessing state for use, storage or consumption in that state (not for resale), regardless of where the purchase took place.

The use tax is typically assessed at the same rate as the sales tax that would have been owed (if any) had the same goods been purchased within the state of residence. Unfortunately, not all use tax derives from sales transactions.

There are also internal transactions an aggregates business might initiate that will trigger use tax consequences such as when a carpet manufacturer sends swatches of carpet to its sales people to use as samples. That is a taxable use of carpeting to the manufacturer (or distributor as the case may be).

It is also possible that equipment purchased under a mining or manufacturing exemption in one state is later relocated across a state line – into a jurisdiction where the exemption no longer applies. In this case, the business must recognize the book value of the capital item when it was relocated as the basis of the use tax due to the nonexempt state.

Unemployment income taxes

Many business owners and managers think of State Unemployment Taxes (SUTA) as just another cost of doing business. Suck it up, pay the bill and get back to work. However, businesses actually have more control over these costs than they might think, and many times the cost savings can be significant.

State unemployment taxes are calculated for each individual employee every year. Each state has a wage cap used for the SUTA calculation that once reached, stops the further liability for additional SUTA tax amounts. Each time an employee quits (who has reached the SUTA wage cap) and a new person is hired, the SUTA obligation starts anew for the newly hired worker. The net result is that employee turnover can be a significant factor in driving higher SUTA costs.

It does not matter whether the worker quit, was fired or filed an unemployment insurance claim. The SUTA liability is calculated on the wages (up to the wage cap) of every employee who worked during the year. Aggregates producers with high employee turnover and relatively low wages have the most SUTA financial impacted from turnover.

As explained, an operation’s SUTA taxes are the product of its experience rating and its SUTA subject wages. Reducing either or both components will reduce the SUTA tax bill. Reducing the operation’s turnover can have an immediate impact on SUTA taxes because it may reduce the amount of SUTA subject wages.


Being the subject of an audit is a fact of life for many large corporate taxpayers. For others, an audit often comes as an unwelcome surprise. Predicting what makes a sand, gravel or crushed stone operation more vulnerable to an audit, state or federal, can prove to be a valuable exercise. Knowing what triggers an audit can help avoid or prepare for the inevitable.

States generally have a system for selecting taxpayers for audit, and they will use a variety of selection methods within that system. Some taxpayers are selected regularly because of their size, sales volume, or the complexity of their returns. Others may be chosen because of a specific event. For example, closing a quarry in a particular location, bankruptcy or the dissolution of the business may trigger an audit.

Small quarry operations may want to consider forming a corporation. Sole proprietors are audited more frequently than small business corporations (including C corporations, S corporations and limited liability companies). Tax departments have determined that sole proprietors are more likely to file self-prepared returns, and those returns are more likely to have errors. Still, there is no guarantee that any taxpayer won’t be selected for audit, even the most careful filer.

The plunging revenues of many state and local governments have prompted many to step up their pursuit of taxes. State and local budgets which seemingly flirt with disaster even in good times are now in dire straits, something with implications for every business. Beware, those often overlooked or misunderstood state and local taxes can be tricky.

Take note

Businesses paid $671 billion in state and local taxes in 2013, up 4 percent from 2012 numbers.

Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years.

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About the Author:

Allison Kral is the former senior digital media manager for North Coast Media (NCM). She completed her undergraduate degree at Ohio University where she received a Bachelor of Science in magazine journalism from the E.W. Scripps School of Journalism. She works across a number of digital platforms, which include creating e-newsletters, writing articles and posting across social media sites. She also creates content for NCM's Portable Plants magazine, GPS World magazine and Geospatial Solutions. Her understanding of the ever-changing digital media world allows her to quickly grasp what a target audience desires and create content that is appealing and relevant for any client across any platform.

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