The R&D Tax Credit Aspects of Logistics Software and Process Innovation



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The 2013 yearend holiday season demonstrated that America's product distribution network was not ready to handle the rapidly growing rush-package demand. Online purchases exceeding industry forecasts, coupled with bad weather, to delay the deliveries of thousands of packages originally guaranteed to be delivered by Christmas. With E-commerce representing a steadily increasing percentage of overall sales, both retailers and shipping companies need to prepare for tremendous shipping volumes during Holiday Seasons to come. To meet this growing demand shipping giants UPS and FedEx must work with online retailers like Amazon.com to develop systems and technologies that can increase their capacity without compromising warehouse operations. Throughout the country, any logistics company, big or small, that wants to remain relevant will need to innovate and markedly improve their logistics processes.

The Research and Development Tax Credit

Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years.

FedEx's Favorable Tax Case Results

FedEx filed a major retroactive claim for millions of dollars in R&D tax credits that would ultimately cause years of legal battles, appeals, and an eventual settlement by the IRS. The original claim filed by FedEx claimed an R&D tax credit that included substantial qualified research expenses (QREs) pertaining to the development of internal-use package tracking software. In 2009, the IRS denied FedEx's claim and in response, FedEx filed a suit in US District Court. The District Court eventually issued a memorandum that sided with FedEx. The decision stated that under tax law FedEx didn't have to meet more onerous tax credit tests for internal-use software they had developed. The government first filed an appeal in the US Court of Appeals for the second circuit, but they decided to settle mostly in favor of FedEx. Although the decision isn't binding for other District Courts and Courts of Appeal, it certainly creates a much more favorable environment for other companies attempting to include internal-use software within their R&D tax credit returns.

FedEx and UPS Logistics Software

A focal point of R&D efforts by both FedEx and UPS has been on developing and implementing highly innovative routing software. This routing software helps drivers choose the most efficient delivery routes for packages. UPS has been testing it's On-Road Integrated Optimization and Navigation (ORION) software since 2008 and begun implementing the software on a small scale in 2013. FedEx's Route Optimization and Decision Support (ROADS) system has been in use since 2008. "Both Roads and UPS' Orion system aim to accommodate all the varying time windows, rush jobs and updated delivery addresses that customers can request."

In recent years FedEx has found improvements in deliveries, training and planning as a result of the ROADS system. The system is constantly working to provide FedEx planners with fewer routes while allowing for drivers to drive less. The software is also especially useful in phasing around disruptive weather that can reduce the reliability of FedEx's delivery methods.

UPS' ORION software launched in late 2013, after almost 5 years of development, and works to crunch data on package information and calculates optimized routes using "car-like telematics", and "user-preferences". ORION has saved UPS an estimated 3 million gallons of fuel during its testing period (2010-2012), and is expected to be in every UPS driver's hands by 2017. Despite these estimates, UPS still puts emphasis on the importance on the decision making of their planners and drivers.

Although these systems are very advanced, constant updates and new developments are needed for these systems to keep up with the growing demand for package deliveries. As the online shopping increase for the 2013 holiday season proved, both UPS and FedEx will need to continue to invest in these systems while they seek even more innovative solutions to meet a larger future demand.

FedEx Institute of Technology

FedEx also sponsors an advanced research facility at the University of Memphis. This advanced research facility promotes cutting-edge research in a diverse range of STEM fields. The high-tech facility is home to over 150 faculty members, researchers and staff who work to develop innovations in areas such as artificial intelligence, biotechnology, geospatial analysis, multimedia arts and nanotechnology. Technology commercialization is only one aspect of the FedEx Institute of Technology. The research center also acts as a local business incubator, fostering corporate engagement and entrepreneurship in the area around the University of Memphis.

Amazon.com - Bots and Drones

When Amazon CEO Jeff Bezos was interviewed by 60 Minutes, his revelation of Amazon's plans to unveil delivery drones was as provocative as it was intriguing. Despite admitting the technology is at least three or four years away, Bezos outlined a serious desire to deliver packages via small octocopters in the foreseeable future. This bold prediction sparked raised eyebrows and doubt-filled dialogue from industry leaders, drone experts and pundits alike. Though experts don't anticipate regulations on commercial and governmental drone operations within United States airspace to come until 2020, six drone test sites were approved by the FAA on Dec 30, 2013 - less than a month following the broadcast of Bezos' bold predictions. Despite the realistic timeline or the long term effects of drones operating in the package delivery industry, the ingenuity and creativity of such a monumental shift in shipping practices poses intriguing questions for the future potential of R&D within the industry.

Even though Amazon's drone program is still in its infancy, amazing technology that operates on a daily basis is streamlining the shipment of Amazon's order. The technological workers, that some might still think of as science fiction, are robots developed by Kiva Systems. After the 2012 acquisition of Kiva Systems by Amazon, three of Amazon's warehouses underwent a transformation. Using Kiva Systems' small robots, a warehouse can become fully automated, with robots retrieving necessary inventory on automated schedules. While humans still have key functions within these high-tech warehouses, the bots help increase the efficiencies of order fulfillments.

What the Future May Hold

Extensive logistics throughout the supply chain of E-commerce are seen through the descriptions of ORION, ROADS, and the Kiva Bots. These evolving technologies are constant reminders of how successful technology can be at streamlining manufacturing, warehousing, and delivery methods. Although new prototypes and constant upgrades allow these systems to evolve, the development of radically different technologies is not always dependent on the success or failure of existing technologies. Although delivery drivers remain a vital part of both UPS and FedEx's logistics programs, future products, such as Google's self-driving car, may change all that. The push by Google and the major auto-makers pursuing plans to develop fully automated automobiles in the not-so-distant future represents a very possible solution to a bundle of today's traffic and safety problems. If such advancements are made in the years to come it is logical to deduce that even the most advanced logistics programs will be taken out of the hands of delivery drivers and placed into the mainframe of automated delivery mobiles. Whether these delivery mobiles are trucks, cars or octocopters remains to be seen, but one thing is for sure - an incredible amount of R&D remains to be done between now and that not-so-distant future and R&D tax credits can support these initiatives.

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Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Charles G Goulding is a practicing attorney with experience in R&D tax credit projects for a host of industries.

Sean Brophy is a Tax Analyst with R&D Tax Savers.