Get Your Cut of the Tax Cut
The Tax Cuts and Jobs Act of 2017 is the biggest change to the business playing field in at least 40 years. The law lowers federal corporate taxes from 35 percent all the way down to 21 percent. As a result, U.S. employers have already announced tax cut bonuses for their employees in amounts as large as $3,000. Apple announced that as a result of the law, it will be investing $350 billion in the U.S. over the next five years. ExxonMobil has announced $50 billion in new investments. And despite recent losses, gains in the stock market confirm investors are getting their fair share of the benefits. But we haven’t heard a peep thus far about what’s in it for customers.
Corporations have four groups of stakeholders:
4) communities in which they operate.
We can readily see how the new tax law is benefiting investors, employees, and communities (via more investment) but I bet no one out there in the procurement community has gotten an excited call from a supplier offering to share the benefits of the new tax law via reduced pricing.
It’s up to us in procurement to understand how much our suppliers have benefited and what our fair share ought to be. For publicly held suppliers, the amount of their benefit is pretty easy to calculate based on their financial filings. So let’s focus on a few publicly held companies, and use the model below to figure out the benefit they’ll derive. We can then hypothesize about our fair share as customers.
Let’s say you have a contract with FedEx. We know that the new federal corporate tax rate is 21%. Let’s assume that their revenue and net income will remain the same as last year to keep things simple. You can find their revenue ($60B) and Income Before Tax (“IBT”) ($4.6B) quickly on Yahoo Finance. Finding their Federal Income Tax Expense (“FITA”) requires downloading their Annual Report as a pdf and searching for a table where that is broken out. They pay state and international taxes also and we want to focus on the federal number.
From there the outputs are easy to calculate. They paid 35% of income in federal taxes last year (FITA / IBT). At the new rate of 21%, they’ll pay only $961MM this year. For a total tax benefit of $641MM. Now before you get too excited, that equates to 1.06% of Revenue. Fedex says they’re going to use $200 million to raise compensation to workers leaving $441MM (0.73%) for investors, communities, and us the customers. How much should we get, my gut tells me that getting a 0.25% discount is doable with a phone call and 0.5% should be the starting point of the discussion. Ordinarily, a ½ or ¼ percent savings opportunity might not garner much excitement, the thing here is that it applies to all your U.S. suppliers. If you spend $1BB in the U.S., you could reap $3.3 million in savings this year. Certainly worth dedicating some time to.
Table: Calculating your Cut of the Tax Cut
I think we can expect some pushback from our suppliers along the lines of “Well, your company is getting benefit from this too!” If you’re U.S. based, I suggest you answer with, “Yes, we sure are. And guess what, our customers are looking for a cut!” If you sell a commodity product, markets will have already reacted and put price pressure on you. In some cases, you may hear from a supplier that they anticipate no or very low profits this year so won’t see much tax benefit. Instead of a discount, you’ve uncovered a business risk worth noting and sharing with your team.
Oh, and if you think your team would benefit from having an SRM platform to track your progress as you embark on calls to several hundred suppliers, start a free trial of LUPR, our Salesforce based SRM app by visiting our website: www.lupr.com
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