Every business today is challenged to meet unprecedented customer demand at a time when supply chains are constrained like never before. It takes a strategic approach to ensure your goods reach consumers quickly and efficiently. And with a McKinsey & Company report noting that execution is now the strongest driver of profitable growth for CPG businesses, your ability to execute even in a difficult environment is vital to your success.
For CPG businesses, keeping inventory and supply chain management flexible can help get products to customers cost-effectively, on an acceptable timeline. But along with that flexibility comes the potential for greater tax implications and financial reporting complexity.
Today’s consumer expectations can impact your CPG business taxes and financial statements in three ways that are critical to consider in your decision-making.
Moving Your Supply Chain Can Create New Tax Footprints
Ensuring you can deliver finished goods to customers on the timelines they expect is more challenging than ever, especially at a time of rising costs. That’s why many CPG businesses are considering moving their production or warehouse locations to reduce supply chain timelines. By maintaining finished goods inventory closer to where your customers are concentrated, for example, you can reduce transit times, cut operating expenses, and meet customer expectations for timely delivery.
When you move any piece of your CPG business’s supply chain to a different jurisdiction, it has the potential to create new tax footprints.
- Given that state, local, and national governments are all seeking new revenue streams by adding or raising taxes, a supply chain move could increase your tax liability.
- The more jurisdictions you operate in, the more difficult it becomes to keep up with the many tax laws that are relevant to your business.
- Operating in new or additional jurisdictions could affect your inter-company transactions and transfer pricing (a financial calculation of the internal price of transferring goods and services across company divisions or locations).
On the other hand, a supply chain move could have a positive effect on the financial performance of your CPG business, which you’ll need to reflect accurately on your financial statements.
For instance, if moving a warehouse enables you to reduce customer delivery times, you might see an acceleration in when sales are booked, increasing top-line revenue on your income statement. Or if moving inventory locations closer to customers reduces your transportation expenses, it will be essential to calculate your cost of goods sold (COGS) correctly to ensure gross margin is accurately depicted on your income statement.
Supply chain adjustments also can impact your working capital as reported on your balance sheet. The longer it takes to receive raw materials from suppliers, or the longer your finished goods are in transit to a warehouse or a customer, the greater the negative impact on working capital.
New Sourcing Arrangements Can Have Tax Implications Globally
The triple whammy of heightened consumer demand, supply chain constraints, and rising costs has many CPG businesses evaluating new sourcing arrangements for raw materials or other supplies. Diversifying across different suppliers and geographic regions could improve your ability to respond to demand cost-effectively and on a competitive timeline.
Yet changes like these can trigger tax consequences, especially if you do business across international borders.
- If your new suppliers are based in jurisdictions you haven’t operated in before, you could be subject to different tax regulations than you were accustomed to.
- As goods flow through different geographic locations and across borders, you may face new indirect tax liabilities, such as value-added tax (VAT).
If you switch your sourcing arrangements to mitigate supply chain challenges, the decision also can affect your financial statements and reporting. Let’s say you discover you can source some of your raw materials at a lower cost or reduce your storage expenses. Your COGS will go down accordingly, which will need to be recorded accurately on your income statement.
Or perhaps you’ve chosen to work with a new supplier located in a different country, which mitigates your supply chain risks but increases your customs duties. You’ll need a tax and finance professional to help you accurately account for those costs on your income statement and assess how this change will affect your working capital, as reflected on your balance sheet.
Selling Consumer Goods Across Borders Has Tax Implications
The adoption of e-commerce, already on the rise, was greatly accelerated by the COVID-19 pandemic. US retail e-commerce sales reached an estimated $870.8 billion in 2021, representing an increase of more than 14 percent over 2020.
With consumers demanding the fastest and most convenient service possible, it’s increasingly likely they’ll purchase your goods online as opposed to in a brick-and-mortar location. And while a strong online presence can help you meet consumer expectations for speed and convenience, it also complicates your finances, especially when it comes to taxes and regulatory compliance reporting.
- Selling your consumer packaged goods across borders exposes you to complex import and customs taxes that can vary greatly by country.
- The additional taxes and customs duties associated with selling across countries will raise your operating expenses, which will impact your gross margin and create pressure to adjust your product pricing.
- Indirect taxes and fees like VAT and customs duties will complicate your regulatory compliance obligations and financial reporting requirements.
- Even selling across state lines within the US can create tax challenges, as it impacts whether you must collect, pay, and report on sales tax on the transaction.
If your CPG business is involved in selling products across borders, especially via e-commerce, it’s critical to ensure you’re recording those transactions correctly in your accounting system to ensure they’re reflected correctly on your financial statements.
For example, recording revenue on your income statement isn’t so simple when some of your sales come through online channels that charge fees to you as the seller. Likewise, accurately calculating and recording your sales tax liability on your balance sheet is more complex if you sell your consumer goods across state or international borders.
Any business decisions you consider as part of your strategy to meet consumers’ evolving expectations and overcome supply chain challenges has the potential to affect your taxes and your financial performance. And that can make the tasks of daily accounting, financial planning, and financial statement creation especially complicated.
That’s where the tax and finance professionals at Simple Startup can help!
We offer comprehensive tax services and strategic financial consulting focused on the unique tax and financial reporting issues that CPG businesses face.
Contact Simple Startup to schedule a meeting with an advisor who is experienced in working with CPG businesses like yours! We can help you determine the tax and financial reporting implications of your business strategies and make the most informed decisions.