As your business grows, so do the complexities of tax compliance. Trust Aktion and Avalara to develop a winning game plan. Avalara tax compliance solutions are the go-to for contractors who need to ace their tax compliance game.
Get ready for 2025 now – register for this webinar featuring the tax experts from Avalara and the construction industry business technology experts from Aktion Associates.
Tax-exempt sales don’t give businesses a get-out-of-compliance-free card. In this webinar, our sales and tax compliance partner, Avalara, will explain the basics of exemption certificates and share tips to help you streamline collection and management to improve customer experience and reduce audit risk.
Click to register to join the conversation and elevate your tax game.
We’ve teamed with Avalara, the industry leader in automated tax compliance solutions to provide our Infor customers with the solutions needed to manage the tax landscape efficiently and accurately. Find out more – attend the Nov.9 webinar. Aktion and Avalara will share strategies for staying ahead of changes in regulations and managing data. The team will address why Infor Distribution ERP users choose Avalara, including:
🏈 Integration: Avalara seamlessly integrates with Infor Distribution ERPs – CloudSuite, SX.e, FACTS and A+ software
🏈 Scalability: intuitive platform scales with your business
🏈 Automation: manual processes and data entry are a thing of the past
🏈 Accuracy: powerful technology ensures compliance with current tax regulations worldwide
Kick-off A New Era of Efficiency with Avalara & Aktion
We’ve teamed with Avalara, the industry leader in automated tax compliance solutions to provide our Infor customers with the solutions needed to manage the tax landscape efficiently and accurately. Find out more – attend our Oct. 26 webinar. Aktion and Avalara will share strategies for staying ahead of changes in regulations and managing data. The team will address why Infor Distribution ERP users choose Avalara, including:
🏈 Integration: Avalara seamlessly integrates with Infor Distribution ERPs – CloudSuite, SX.e, FACTS and A+ software
🏈 Scalability: intuitive platform scales with your business
🏈 Automation: manual processes and data entry are a thing of the past
🏈 Accuracy: powerful technology ensures compliance with current tax regulations worldwide
The construction industry has a well-deserved reputation for being tough, and that’s as true for construction-related sales and use tax as it is for completing a job on time and on budget.
Every transaction involved in a construction project, from the general contracting services to labor to materials and supplies, may or may not be subject to sales and use tax. Factors affecting taxability include the type of client, the type of contract, and the location of the project.
Sales to government agencies, nonprofit organizations, or religious institutions may be exempt from sales and use tax in certain situations.
In California, for example, sales and use tax generally doesn’t apply to sales of machinery and equipment to U.S. contractors or subcontractors when the property passes to the U.S. government before the contractor makes any use of it. Yet the contractor may have to issue a resale certificate.
Michigan allows contractors to make exempt purchases of materials that will become a structural part of real estate for a church sanctuary or nonprofit hospital. Otherwise, contractors in Michigan generally pay tax on all equipment, materials, and supplies used to fulfill a contract; they can then charge their clients the tax so long as they don’t break out the tax on the invoice.
Construction projects can be billed several different ways: as a lump-sum, time and materials, or cost-plus-a-fee. Each type of contract may have specific sales tax implications in each state.
Generally, in a lump-sum contract, the agreed cost of the job includes all charges for labor and materials unless there’s a change order (i.e., the scope of work changes), as well as overhead and profit. The contractor typically pays sales tax when purchasing equipment and materials for the job but doesn’t charge the client tax for that equipment or material.
With a time-and-materials contract, however, the contractor can generally purchase materials tax free using a resale or exemption certificate and then charge its client tax for those items.
Again, these are general rules of thumb: The taxability of these transactions varies by state and situation.
Many states with a sales tax have essentially tax-free zones.
For example, construction materials purchased to improve and develop certain vacant buildings may be exempt from sales tax in Erie County, New York. And labor, materials, and services used in the construction of new facilities used for airplane repair and maintenance may be eligible for a sales tax exemption in Washington state.
The sale of construction materials to a Native American contractor is generally exempt from Wisconsin sales and use tax if the materials are delivered to the Native American contractor on the Native American contractor’s tribal land, and the construction materials are used on the Native American contractor’s tribal land. However, if the materials are later used by the Native American contractor outside of their tribal land, Wisconsin use tax would apply.
It takes experience and skill to successfully manage and execute a construction project. Likewise, it takes experience and expertise to get sales tax compliance right. The most effective way for any construction business to handle sales tax is to leave it to the experts. Tax exempt? Check out Avalara’s latest whitepaper on How to keep tax exempt customers happy
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
Distributors, manufacturers, and wholesalers may not have to collect and remit sales tax, but that doesn’t necessarily mean they’re free from sales tax obligations. They likely need to register with the tax department, file returns, and validate exempt transactions if they have a physical presence in a state or make significant sales into a state where they have no physical presence.
Physical presence
Having a physical presence in a state creates sales tax nexus — the connection that triggers an obligation to comply with the state’s sales tax law.
It seems straightforward, but not every state defines “physical presence” the same way. It’s not always limited to a brick-and-mortar store or distribution center. For example, physical nexus can be established when an out-of-state business:
For more details, see this state-by-state guide to physical presence nexus.
Economic activity
Since the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018), a sales tax obligation can also be established solely through sales activity in a state (e.g., sales volume or number of transactions). This is economic nexus.
All but two of the 45 states that have a sales tax now enforce economic nexus, as does Washington, D.C., and some parts of Alaska, which has local sales tax but no state sales tax. Florida and Missouri are the only two states that have a sales tax but haven’t adopted economic nexus, and they likely will eventually.
Most state economic nexus laws provide an exception for small sellers, those selling under a certain threshold. This economic nexus threshold varies from state to state. Examples of thresholds include:
For a complete list of economic nexus thresholds, see this state-by-state guide to economic nexus laws.
Many distributors don’t engage in retail sales and therefore don’t need to collect or remit sales tax. Yet if their sales exceed the economic nexus threshold in a state where exempt sales are included, they may be required to register, file returns, and track exempt sales with a valid exemption or resale certificate. Businesses that fail to do so risk being out-of-compliance.
To learn more about sales tax risks for distributors, check out managing exempt sales during the rise of economic nexus.