Sales and use tax play an integral role in a manufacturer’s overall tax planning strategy. When weighing decisions about the products and services you purchase, as well as those you sell to customers, a smart approach to sales and use tax can affect your profitability and reduce your exposure for timely audits and costly penalties. Some states charge as much as a 200 percent penalty for noncompliance.
Conversely, some manufacturing equipment is tax-exempt in 35 states, and three others offer a reduced tax rate. Depending on your business and its location(s), there are multiple reporting requirements and varying rates. So how can manufacturers keep track of what is due – and where – without burdening their tax and IT departments?
Common tax compliance challenges include:
- Determining what is taxable
- Trying to track “use” tax
- Using accurate rates
- Documenting and filing accurate reports
- Ensuring that your process is auditable
- Understanding Nexus
First, let’s break it down by examining a few key issues in sales and use taxes.
Which items incur a tax liability? Which are exempt, and where? Direct sales typically require you to collect and remit sales tax. However, items that are sold for resale are exempt from sales tax collection. For manufacturers who only sell to large distributors or wholesalers, this may mean fewer than 50 exemption certificates. If you have multiple resale customers, you’ll need to maintain and continually update your documentation to ensure the resale exemption is valid.
When items are sold online, things become even trickier. Easy integration of sales tax rules is critical to making the online purchasing process easier for your customers. Either way, you must make sure you are applying current rates and following taxability rules for each applicable sale.
A Word About Sales Tax Nexus
The tax law bases Nexus sales on where you have a presence, but that doesn’t mean your facility itself has to be there. Nexus is the framework that allows a state to collect taxes from outside its taxing jurisdiction when a business has a substantial percentage of its overall sales in another state or locality. For instance, even when the location of your manufacturing or distribution center is in one state, you can be liable for paying taxes in states where your products get their finishing touches or are serviced, especially when you have team members doing that work.
As nexus often involves multistate taxation, it is a widely debated topic and the subject of legislative and regulatory action.
For many manufacturers, use tax can be a bit trickier. Think in terms of a tax that would be imposed on transactions if the seller and purchaser were in the same state. Some manufacturers take a gamble that their vendors will apply the correct state and local sales tax to their purchases, and this is a gamble that can eventually lead them to trouble.
It’s a best practice to take tax responsibility for any products consumed in your manufacturing process, as well as on services purchased. To make things even murkier, in some states certain products are not taxed when they are used to build your equipment, but they are taxed if they are used to repair that equipment. Once you have it all sorted out, you must ensure that the correct amount of tax is accrued for each item so you can file a timely use tax return.
Technology to the Rescue
While we have just briefly addressed sales and use tax considerations in this blog, are you picking up on a common theme? It’s complex, and there is the burden of tracking tax obligations in nearly 10,000 U.S. tax jurisdictions, tracking and updating exempted tax certificates and determining whether there is nexus. If the Supreme Court rules in favor of taxing all internet sales, the compliance burden will only be magnified.
In addition to working with a qualified tax professional, automating your sales and use tax requirements with the right software program can go a long way toward relieving your team of compliance requirements. The right software can provide accurate sales and use tax calculations per location; digital storage of exemption certificates; records of your filed tax returns; updated tax rates; and easily accessible records in the event of an audit.
For example, your software should automatically accrue use tax on invoices that can be processed by accounts payable rather than requiring time-intensive manual entries. You can expect to see advancements in the next few years in how software can be used for real-time tax collection/remittance.
Whether or not you utilize a software system, your tax professionals can work with you to spot any inefficiencies and inconsistencies in your sales and use tax process. The point is to avoid a field audit of your sales and use tax practices, which can be quite costly and even put your business in jeopardy. The last thing you want to do is drain your profitability by paying penalties for under-accrued use tax or uncollected sales tax.
Goldin Peiser & Peiser works with manufacturers on tax strategies that will help them meet their financial goals and objectives. Learn more about the Manufacturing and Distribution Services Group at Goldin Peiser & Peiser.
For more information, please contact the Manufacturing and Distribution Services Group or reach out to Kevin Harris, CPA, at 214-365-2473 or KHarris@GPPcpa.com.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.