When it comes to sales and use tax, the manufacturing industry is riddled with potential land mines. Challenges arise at the outset, when determining nexus — the connection that establishes a sales tax obligation. They continue with registration, collection, and remittance. And since manufacturers often deal in exempt inputs and sales, managing and validating exempt transactions tends to be one of the most complicated aspects of compliance for businesses in the manufacturing industry.
Sales tax compliance can quickly become overwhelming for manufacturers. To make it less so, it’s helpful to break it down into five buckets:
There are many ways for a business to establish nexus with a state, including having ties to affiliates in a state (affiliate nexus) or having a physical presence in a state. Nexus can also be created solely through economic activity (economic nexus).
Today, 43 states and the District of Columbia enforce economic nexus. Most provide an exception for small businesses with sales beneath a certain threshold (e.g., $100,000 in sales or 200 transactions). But since thresholds in many states include exempt sales, economic nexus laws often apply to manufacturers.
Register with the state tax authority as soon as nexus with a state has been determined. Yet if you think you may previously have established nexus, consult with a trusted tax professional prior to registering. Businesses with a past tax liability often benefit from entering into a voluntary disclosure agreement with the state.
Once registered, you need to calculate and collect the correct amount of sales or use tax on all taxable transactions. It’s a big job. There are more than 13,000 tax jurisdictions in the United States, and each has a unique sales tax rate and jurisdiction code. Adding to the complexity, states have unique product taxability rules, so what’s exempt in one state may be taxable in another. Rules pertaining to manufacturing inputs and outputs can be particularly complex.
Managing exempt transactions is perhaps the most challenging aspect of sales tax compliance for manufacturers. Every exempt purchase or sale must be validated with a proper exemption or resale certificate, and failure to properly document exempt sales is a common cause of negative audit findings. Automating the collection, storage, and renewal of exemption certificates greatly improves the process and reduces errors.
The final step in the sales and use tax cycle is filing and remittance. Processes that vary from state to state, so arming yourself with information is essential: You need to know filing frequency, due dates, and format — some states require some or all businesses to file and remit electronically.
For more information about achieving end-to-end sales tax compliance, check out 5 Steps to Managing Sales Tax for Manufacturers