To help close a $3 billion budget deficit, Pennsylvania Gov. Tom Wolf (D) has asked the state legislature to extend the state’s 6% sales and use tax to commercial storage services, drawing strong criticism from business groups, especially warehouse owners.

Operators of third-party logistics warehouses and other business interests have mounted a campaign to derail the tax. It includes academic research sponsored by the warehouse industry that reinforces their contention that the tax would be counterproductive because it would drive warehouse and distribution business to surrounding states where costs would be significantly lower.

“When looking at the full impact, it’s clear to see that this translates to an actual loss of tax revenue, caused by a loss of economic activity, a loss of population and a loss of income and sales taxes,” says Paul Delp, president of Lansdale Warehouse Co., which operates a cluster of warehouse facilities in the area surrounding Lansdale, Pa. “Our communities will end up with large, empty warehouse buildings that are not leasable, creating real estate taxation issues and revenue issues for local governments and schools.”

This isn’t the first attempt to extend sales taxes to include warehouse services. In 2010, then-Gov. Ed Rendell (D) was forced to back off his proposal to impose such a sales tax after he ran into a buzz saw of opposition from the industry and other business groups.

The International Warehouse Logistics Association (IWLA), which was in the thick of the fight seven years ago, asserts that Wolf’s new tax would cause the industry an average loss in annual revenue of $250,000 per warehouse, resulting in layoffs and storage and distribution businesses choosing to leave the state.

IWLA president Steve DeHaan also says the tax constitutes double taxation for Pennsylvania consumers. ‘Not only will consumers have to pay state sales tax when purchasing goods at the store, but they will in effect be paying this ‘commercial storage services’ tax as well when warehouse customers pass along the cost of the tax into the retail price of the product.”

 

Looking at the Hard Facts

Corey Rosenbusch, president of the International Association of Refrigerated Warehouses, explained in a letter to legislators how imposing the tax will put warehouses in Pennsylvania at a significant disadvantage with competitors in neighboring states like Maryland, New Jersey, New York and Ohio, which don’t have such a tax.

The 3PL industry is inherently interstate in nature—its customers are largely moving product either into, or out of, Pennsylvania, he noted. “Companies in neighboring states would have an immediate 6% market advantage. Warehouse customers can easily choose providers anywhere along the supply chain, including neighboring states.”

To back up its arguments with facts, IWLA asked the Penn State Center for Supply Chain Research to study the issue, and the center’s research has confirmed the industry’s view of the tax’s negative impact.

‘This report clearly indicates the likely result will be a net deterioration of overall tax revenue,” the Penn State researchers conclude. “The likely decreases in other types of tax revenues will either partially or fully offset the projected increases. In a worst-case scenario, the net impact of eliminating the sales tax exemption for warehousing and storage companies will be that incremental tax revenues do not increase, but actually decrease overall.”

The center also found that the warehouse industry in the state is one of the central lynchpins to the nation’s supply chain. The industry is so heavily concentrated in Pennsylvania that it is the second strongest warehouse employer in the nation, second only to California, the Penn State researchers point out.

Even without the sales and use tax, Pennsylvania is considered to have the fifth highest corporate tax rate for mature distribution centers, according to a 2015 report from the Tax Foundation and accounting firm KPMG.

Of more concern to supply chain managers and customers should be the fact that policymakers in other states can be expected to take notice if Pennsylvania succeeds in imposing and maintaining this new tax. Currently, only five states impose such taxes on warehousing, none of which is considered central to the flow of goods: Hawaii, West Virginia, South Dakota, Mississippi and New Mexico.

In 2007, a similar 6% use tax on warehousing passed and was enacted in Michigan. However, the legislators quickly turned around and pulled back the tax after a report from Michigan State University, also funded by IWLA, vividly depicted the economic damage that would be done to that state if the tax was allowed to continue.

Other states also may similarly change their minds if they choose to follow Pennsylvania’s unhappy example. The KPMG study cited by the Penn State researchers also shows 90% of the states that considered commercial storage taxes have either backed away or chose to repeal them after they were enacted.