Retailers Miss Out on E-commerce Transformation Tax Incentives: Low R&E Credit Claim Rates
With the rise of e-commerce, retailers have increased digital investment but often overlook the benefits of state-level research and experimentation (R&E) tax credits on investment returns. A KPMG survey found that about one-third of eligible companies have never claimed such incentives. The article notes that IT investments also qualify, but the complexity of the methodology is often overestimated. It lists claimable cases such as automated delivery and AI supply chain optimization, and mentions that the Biden administration is considering expanding the scope of R&E credits, including raising the qualified percentage for external research costs (currently 65%). Multinational companies can also leverage overseas R&D incentives.
Editor's note: Gregory Bocchino is the partner and national leader of KPMG's Accounting Methods and Credit Services practice, and Ajay Wanchoo is a managing director in that practice. The views expressed in this article are those of the authors.
Since the onset of the pandemic, the rapid growth of e-commerce has prompted retailers to increase investment in digital transformation while exploring new ways to reach customers. However, many retailers may not realize that through efficient tax planning—such as leveraging state-level research and experimentation (R&E) tax credits—they can significantly enhance their return on investment.
A KPMG survey of approximately 1,000 tax professionals across industries revealed that one-third of respondents said they had never claimed federal or state R&E credits or other incentives, despite being eligible. The reason is that companies have traditionally focused on highly innovative product or process improvements when claiming credits, overlooking less conspicuous investment areas such as information technology.
Furthermore, the methodology for identifying qualifying expenditures and preparing supporting documentation is often perceived as more complex in practice than it actually is. However, various technological tools are now available to help automate the process.
Claiming R&E Credits: From IT to Innovation
R&E tax credits are increasingly drawing attention beyond the accounting department, and for good reason. More chief technology officers, vice presidents of engineering, directors, and other retail technology leaders are recognizing that the value of these credits extends beyond improving the organization's effective tax rate—it also helps drive innovation to remain competitive and optimize their "digital front door." This enhances both business efficiency and the return on digital investments.
Retailers need to assess whether and to what extent their investments qualify for federal and state R&E credits. Key factors include whether projects are technical in nature and involve innovative processes. Qualifying costs include employee wages, research supplies, contractor expenses, cloud computing costs, engineering and design fees, and other expenditures directly related to the projects.
The following are examples of retail areas that may qualify for R&E credits:
- Automating delivery processes
- Developing sustainable, eco-friendly apparel using biodegradable materials and building information technology systems that support fast-fashion concepts
- Developing applications to migrate brick-and-mortar operations online
- Introducing drone delivery
- Using AI-based software to optimize supply chains
- Incorporating robotics into warehouse management
- Developing blockchain-based product tracking systems
- Developing software for internal organizational functions such as financial management and daily operations
Expanding Credit Scope: Policy Developments
The Biden administration and the U.S. Congress are considering several tax law revisions aimed at creating jobs and driving economic recovery from the pandemic. Expanding the scope of R&E credits is one of the options under consideration. For example, prepayment mechanisms for R&D credits and increasing the percentage of qualifying external research expenses are being considered (currently, taxpayers can only claim credits on 65% of external applied research expenses).
For multinational organizations developing software and conducting research across borders, additional opportunities may arise from R&E tax incentives available overseas as well.
As the retail industry seeks new ways to engage customers through multiple channels—phone, laptop, brick-and-mortar—convenience has become a key element of successful marketing. Investing in digital transformation—while considering the potential for substantial tax credits—should be a strategy for retailers to compete effectively in the new environment and uncover new growth opportunities along the way.