American businesses, both small and large, face a lot of challenges, especially in their infancy. Arguably, one of the biggest challenges that they face is tax regulations. Often times, these regulatory obstacles can be a silent killer that cripples an otherwise growing business to the point of no return. In other cases, it presents an on-going mission to find ways to dodge regulations and pay less taxes to ultimately improve profits.
Since there are so many different tax regulations, between state, local and federal levels and also between different industries and geographical locations, they afflict American businesses with a cornucopia of problems and hurdles. Books twice the size of Leo Tolstoy’s War and Peace have been written about the American tax regulation system and even they don’t adequately cover the subject.
That said, it is important to take a look at some of the main reasons that tax regulations challenge American businesses, in an effort to possibly help a small, growing business better prepare itself as it expands and to simply inform people on some of the issues that tax regulations have caused, such as the vast number of US factory jobs that have moved overseas.
1. Tax Regulations Put Pressure On Small Businesses
When you consider that smaller, growing businesses and entrepreneurial efforts are commonly considered the lifeblood of our economic system, this is actually a rather bizarre paradox. Logically, it would stand to reason that governing forces would want to make life easier, from a tax regulation standpoint, on smaller businesses. The reality, however, is often not so. If you are starting your own small business, or have already done so, you will quickly face this harsh realization.
The problem is that tax regulations are incredibly complex. While a larger corporation certainly faces more challenges and will ultimately pay more taxes, they also have the tools and know-how to adeptly handle these tasks. They have the ability to employ entire teams of experts that work towards ensuring compliance and limiting taxation. A smaller business, on the other hand, has a lot less experience and has a lot fewer resources available to them when trying to navigate the swampy nature of federal, state and local tax regulations.
Furthermore, there is no one-size-fits-all solution to handling these challenges because tax regulations can change from state to state, industry to industry and even town to town. Thus, these companies will frequently struggle with getting the right information that applies to their unique business and location. In the worst scenarios, companies are hit by taxes that they were not aware existed and didn’t adequately plan for. Thus, they have to scramble to meet this previously unknown standard.
2. Many Regulations Require a Huge Dedication of Time and Resources
After recent examples of major fraudulent behaviors by companies like Enron and WorldCom, regulators enacted a number of legislative acts, in an effort to prevent future occurrences from happening. To achieve this desired result, many corporations have to present incredibly detailed accounting reports that demonstrate their continued adherence to these standards and their corporate responsibility.
Many companies have complained that maintaining these standards takes a huge amount of time. These accounting audits happen frequently, especially when a company routinely has to disclose financial statements to future investors. Additionally, the reporting has to be flawless, which requires nearly around-the-clock double-checking to ensure no errors are made.
Due to how much raw data is needed for these reports, significant storage and curation is needed, especially considering that much of this data is already electronic. This has required businesses to overhaul their IT departments to encompass these new responsibilities, which sucks up a lot of existing company resources. It has also created the role of Chief Data Officer; this individual’s sole responsibility is to ensure data accuracy and handle the reporting and conversations with regulators.
Alternatively, taxes, penalties and other regulations can take an abundance of time before becoming cleared up. This can handcuff businesses for long periods of time and severely hamper their growth. For example, the Food and Drug Administration (FDA) and pharmaceutical companies have long battled over how long it takes for drugs to pass the extensive clinical trial process and receive approval for sale, even after these products have been proven effective by their creators. This process puts the pharmaceutical company in limbo while they wait and can halt their business.
3. They Cost Businesses a Lot of Money
Perhaps the biggest gripe that American businesses have with regards to tax regulations is how much they cost them. They get in the way of a company’s ability to drive profits, expand and grow. In certain industries, where there are numerous financial taxes that have to be paid, it can quickly make a company feel like the government is reaching too many hands into their pockets. In other cases, simple adherence to industry standards is extremely costly.
For example, the Environmental Protection Agency has strict standards regarding how companies dispose of potentially dangerous waste and pollutants. While this is better for the environment and ensures that companies are being responsible with their waste, it presents a big financial issue for businesses because disposing of them to the EPA’s standards is incredibly expensive.
The penalties for failing to adhere to these standards or other regulations can also be very negatively impactful on a business’s financial situation. Even something as small as a simple data inaccuracy or other error can cause a company to be slapped with larger taxes, big penalties and other restrictions. In extreme cases, they can also cause business to slow down or even halt completely.
4. Strict Regulations Cause Businesses to Move Elsewhere
When you consider the time, money, resources and headaches that our tax codes cost American businesses, it is easy to see why many businesses relocate their plants, manufacturing facilities and even their headquarters to another country with fewer and less restrictive taxes and regulations. While fewer taxes aren’t the only reason for jobs and factories to be pushed overseas, it is certainly a huge contributing factor.
The big allure, in terms of taxes, that attracts businesses to foreign countries is that many have a tax-rebate program. So, while they do tax corporations, if a company exports its products to the US or other places, many foreign governments tax laws offer a rebate, which ultimately forgives most or all of these taxes. This allows an organization to avoid most major taxes in both the US and whatever foreign company they’ve set up shop in.
There is also a lot to be said about the less restrictive standards in many foreign countries. China, for example, only requires a minimum wage of $0.30 an hour. Additionally, companies don’t have to worry about strict safety codes, waste disposal processes, and other regulations that eat at the bottom line.
In comparison, the American tax system can come across like a set of overly protective, strict parents, while China and other foreign countries are the super relaxed parents that let their kids watch TV, drink soda after eight o’clock and watch R-rated movies. What business isn’t going to want to have an extended stay there?
5. Tax Penalties Can Occur Unexpectedly
We touched on this earlier in reason #1 and the challenges smaller businesses face, when it comes to tax regulations. To reiterate, it is difficult to plan for what you don’t know is coming and, a lot of times, businesses don’t see a big tax penalty coming. It may happen because there was an error in your compliance reporting that wasn’t caught in time, a tax law that you simply were not aware of, or accidental negligence to an industry standard. Whatever the case may be, penalties can not only hurt your bottom line (and hurt it badly) but they can also severely cripple your brand’s reputation and standing within the industry.
Earlier in the year, Uber and Lyft both became under fire by multiple lawsuits from a contingency of groups in Chicago that claimed it owed taxes through what is know as the Airport Departure Tax. This fee is enforced by the Metropolitan Pier and Exposition Authority (shortened to McPier) and targets anyone (minus government agencies) that is charging passengers for transportation to and from the area’s commercial airports. The rate is $4 per vehicle, which could end up costing these ride-sharing services millions of dollars, including additional interest fees and other penalties.
While it is very much unclear if this lawsuit will be successful (Uber has called it an illegal tax because they are not operating “for-hire” vehicles and thus don’t fall under the same classification as taxis, limousines and other vehicles that are affected by this tax), it demonstrates two things. First, it shows how a simple tax can quickly spiral into a million dollar lawsuit, especially when you aren’t aware of it. And secondly, it drives home how important it is to be aware of your local tax regulations.
This fear of what penalties may be lurking around the bend has caused a lot of bigger companies to adopt data analytics solutions. These types of software have the ability to predict compliance issues, before regulators catch them and slam you with fines, by combing through large volumes of big data in a short amount of time. In some cases, these tools have allowed corporations to dodge massive recalls and major regulatory issues, by catching crises in their earliest stages. Unfortunately, many of these solutions are costly and require in-house data scientists to run effectively. Thus, smaller companies aren’t going to have the budget to obtain them.
Is There A Good Side To Tax Regulations?
From a business standpoint, it is easy to look at taxes and regulations as a hindrance to your company’s growth rate, a negative impact on your profits and bottom line and a general pain in the you-know-what. In the best of lights, we see it as a necessary evil. Yet, even that isn’t really a fair summation. Taxes are necessary, but they aren’t inherently evil.
Regulators are as much a friend of business as they are of the public and the American consumer. It is difficult to remember this, when we are facing a penalty or fee that threatens to destroy our business’ would-be profits, but the same governing bodies that dish out these regulations and fees also supply the same businesses with a lot of beneficial services, such as financial, advisory and similar services.
These regulations are put in place to serve the interests of the community, of which we are all members. Regulators are a bit like the referees or umpires in a sports game. When the call is in our favor, we appreciate their job. When the opposite occurs, however, we storm the field and kick dirt on their shoes. At the end of the day, they have the best interests of all parties in mind.
Even in the Uber and Lyft lawsuit in Chicago, for example, McPier isn’t trying to enforce this tax because they are rubbing their hands together at the thought of getting a “cut of the action.” This tax helps pay for a number of tourism-related programs, including Choose Chicago; it helps pay for the maintenance and improvements to the city’s major convention center and more. These are programs help improve the quality of life in Chicago by promoting more tourism and having pristine facilities for large conventions and thereby generating more business in the area.
Initially, it may be easy to look at that story and feel that Uber and Lyft are being penalized unfairly. But, for the community of Chicago, the view point is much different and many of the parties involved have this feeling that Uber and Lyft are outsiders that are profiting and actually taking away from the budgets of these vital programs that benefit local businesses tremendously.
Again, it is hard to see the bright side of taxes and regulations if you are a business that is having its success greatly impeded by them. There are certainly more obvious examples of how tax regulations challenge American businesses, rather than help them. Thus, it is easier to see these governing bodies as a foe, instead of a friend. That said, there is a case to be made that these regulations shouldn’t be seen as a necessary evil, but rather a necessary requirement as a member of your local, state and even global communities. And, that those companies that skirt this commitment by taking their factories (and jobs) overseas to the “cool parents” aren’t taking this responsibility seriously.