Managing Pricing and Compliance Costs to Maximize Returns

There is a common cost of business related to both taxes and governmental regulations: compliance-related expenses. These include:

  • Obtaining business licenses and permits
  • Retaining multiple documentation to substantiate positions
  • Calculating amounts owed to the tax authorities and other regulatory bodies
  • Paying the parties who perform the calculations, fill out the necessary forms, and defend audits.

While some of these costs, such as procuring a business license, apply to all revenue streams, others apply only to certain jurisdictions or business lines (or combinations of the two). In some situations, firms may find that it makes sense to allocate these costs to specific products, services, or distribution centers in particular jurisdictions. For example, a retailer that decides to sell alcoholic beverages will have to meet jurisdictional requirements (e.g., participate in state-approved employee training) and will incur expenses (e.g., licensing fees) directly attributable to the new offering.

By examining profitability at a granular level, management can see what each product and service brings in, and how changes in compliance costs may affect the business if it enters a new market in a new jurisdiction. Management can then set prices that incorporate these added expenses instead of throwing all compliance and regulatory costs into the selling, general, and administrative (SG&A) expense bucket, where their allocation ...

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