Navigating Credits for Fulfillment Centers

How retailers can capitalize on tax incentives for developing and expanding fulfillment centers.

By Steven Bandolik and Kevin Potter

Steve Bandolik
Steven Bandolik

This month it’s all about retail, and in light of the International Council of Shopping Centers’ RECon conference, we’re going to take a deeper dive into a burgeoning trend affecting the space. Increasingly, retailers are moving away from the single-hub distribution model and instead building out multi-location networks of fulfillment centers.

We laid out the ‘why’ to this in our January column on the last mile, and this month we’re going to take the next step and discuss the ‘how’ with an eye to exploring and capitalizing on tax incentives for new properties.

Federal, state & local checklist

There are thousands of credit and incentive programs in the U.S., which are designed to encourage business activities ranging from hiring and new job creation, to more recent enticements for going green. These credits and incentives are offered at the federal, state and local levels and should be taken into account when a fulfillment center is being developed or expanded.

Kevin Potter
Kevin Potter

For retail executives looking to expand their fulfillment center footprints, here are some of the most significant tax incentives to consider during contract negotiations:

  • Hiring credits: Federal and state hiring credits can help offset the significant investment an organization is making in a fulfillment center. For example, the Work Opportunity Tax Credit (WOTC) provides up to $9,600 in federal tax credits for each eligible employee hired. Of note, employees in retail or sales jobs make up the largest group of new hires eligible for WOTC certification.
  • Property tax abatements: Property tax is both an above-the-line item and a major expense. While taxes vary by state, county and city, a full or partial abatement—as seen in this New York City rehabilitation exemption case—should be explored as a strategy for mitigating retailers’ tax liability when a property is being developed or renovated.
  • Sales and use tax exemptions: These exemptions can reduce or even eliminate state and local levies on property and equipment used in a fulfillment center.
  • Economic development, job and investment credits: As states focus on improving their economies, they are very interested in supporting businesses that are expanding and creating jobs for their residents.

While the opportunities noted above can be significant, retailers should also consider negotiated economic development incentive programs (see table, right)

516CFO_tableAs a case in point, we recently published an article discussing how Virginia is implementing a variety of incentives in order to spur economic development.

While our list is by no means exhaustive, it provides representative examples of what may be available for construction or renovation of fulfillment centers. Giving them a close look early in the site selection process will help you structure your project in a way that makes the most of the incentives available.

Steven Bandolik is a director with Deloitte Services LP and a senior leader in Deloitte’s real estate services practice. A 30-year industry veteran, Bandolik provides advisory services in a wide range of business areas, including capital markets, corporate finance, mergers and acquisitions, investments, restructuring and reorganization, workouts and asset recovery.

Kevin Potter is a director in Deloitte’s National Credits & Incentives practice. He advises clients on all aspects of statutory credit reviews and other similar projects for large and mid-size multistate corporations.