In this era of government budget deficits, the third-party logistics (3PL) industry has never been more vulnerable to damaging state and local tax initiatives. Most recently, the governor of Pennsylvania proposed a 4 percent sales tax on services, including warehouse storage. In Washington State, several cities considered a tax on each loading dock door. In Michigan, the governor proposed a sales tax on services, which passed and then was ultimately repealed in 2007. In Illinois, legislation is pending to extend the existing sales tax to certain services, including warehousing, although the proposal currently does not apply to business-to-business warehouse services.

The potential impact on the supply chain and 3PLs is incalculable. Given that a sales tax is paid by the “user” of the 3PL services, a sales tax increases the cost of warehousing in the state, pressuring distribution centers to relocate to neighboring states where the tax climate is more favorable. In response to the Pennsylvania proposal, a Virginia member of the International Warehouse Logistics Association (IWLA) suggested “thanking” Pennsylvania Gov. Rendell for sending more warehousing business to Virginia.

This kind of message should be communicated to governors and legislators throughout the country. To encourage this very thing, IWLA is hosting a 3PL legislative summit in Washington, D.C. to launch a unified strategy to proactively address sales tax initiatives. A model for this strategy will be the successful plan IWLA deployed in Michigan in 2007, which included a study by Michigan State University documenting the revenue benefits that 3PLs bring to Michigan and the resulting jobs and revenue loss if a service tax on warehousing and logistics had been imposed.

As the industry learned in Michigan, state officials do not understand the 3PL industry nor do they understand third-party warehousing. A major reason for repeal of the Michigan tax was the Michigan State study, which concluded:

•    Michigan would lose over 7,000 warehouse and transportation-related jobs.

•    Employee- and company-related tax revenues to the state (not considering the sales tax) would decline by $51 million.

•    Not including the multiplier impact, the $51 million would represent a breakeven with the proposed service tax.

•    When the multiplier impact was considered, the state would lose approximately $55 million in tax revenue.



Perhaps the biggest challenge we face is the states’ lack of credible information. In a friendly exchange between an IWLA member company and Governor Rendell, for example, the governor asserted that all of Pennsylvania’s neighbors already tax warehousing. In fact, most neighboring states do not tax warehousing, and New Jersey law specifically exempts public warehousing services. 

New sales tax proposals are not the only threat to 3PLs. Many states are stepping up enforcement of existing tax laws, which typically claim that a tax nexus occurs when an out-of-state company stores product in an in-state 3PL warehouse. As a result of nexus, the out-of-state company becomes subject to the state income or franchise tax. Several states are becoming very aggressive in assessing taxes:  New Jersey has threatened to subpoena a 3PL’s customer account records; the California Franchise Tax Board demanded that a 3PL provide extensive information on all customers within the last eight years; and the State of Washington assessed a California company more than $200,000 in taxes and penalties because its product was held in a Washington State 3PL warehouse. Since “tax nexus” is ultimately a federal issue, IWLA continues to pursue a legislative solution in Congress through the Business Activity Tax Simplification Act. Yet, with a difficult political climate on Capitol Hill, a solution is not in the immediate offing. 

For the 3PL industry and the entire supply chain, our mission is clear. We must educate legislators and tax officials on the realities of the supply chain. They need to understand that inventories are continually in motion in interstate commerce-that interstate commerce does not “see” state boundary lines. And, most important, they need to recognize that the 3PL industry is a jobs creator and that misguided tax policies eliminate jobs, because distribution centers go where the tax environment is most favorable. They must understand that short-sighted tax policies have consequences. They alter supply lanes, add costs to the distribution process, jeopardize investments made in facilities and personnel, and for any state, that spells lost jobs and lost tax revenues. This is our message and the time to speak is now. wt



Patrick O’Connor is president of Kent & O’Connor and serves as IWLA’s D.C. representative.