Growth is a tenet of both economists and manufacturers. While it may be good for investors and bottom lines, growth is not without risk: It can quickly put manufacturers out of sales tax compliance.

Much of the manufacturing industry’s growth in the past few decades resulted from improved efficiency. Today’s growth is largely due to new channels: selling directly to consumers, entering the global marketplace, and offering new services. Each brings rewards, and potential sales tax traps.

Entering ecommerce

The internet not only allows individuals to work remotely and shop in pajamas: It has blown retail open. No longer reliant on brick-and-mortar stores, manufacturers are increasingly selling directly to consumers (D2C). That’s a bonus for entrepreneurs interested both in creating products and shaping a specific customer experience. Indeed, some manufacturers see retailers as a hindrance: “Without a direct relationship with our customers, feedback can become obfuscated through an inefficient [retailer] proxy,” says Rob Canales, CEO and co-founder of ROKA, a Dallas-based performance multisport brand.

The downside of the D2C model is that it requires manufacturers to become retailers themselves. Manufacturers have traditionally operated in an exempt sphere, selling goods for resale, exempt from tax. As retailers, manufacturers must comply with sales tax laws wherever they have nexus — a connection substantial enough to trigger a tax obligation.

If the beauty of the internet is that it presents easy access to consumers worldwide, one potential pitfall is that it can help businesses establish nexus in places where they lack a physical presence (the traditional cause of nexus). With state and local sales tax revenue declining as untaxed online sales by remote retailers increase, states are broadening their definitions of nexus to include affiliate relationships, online referrals, economic activity, and even the placement of cookies on in-state devices. This makes nexus something that needs to be closely monitored.

Most goods and a growing number of services are subject to sales tax in 45 states, though product taxability can differ and rates vary from state to state, town to town, and sometimes even house to house. While it has many upsides, venturing into ecommerce significantly complicates sales and use tax compliance for manufacturers.

Going global

Ecommerce has also enabled manufacturers to more easily enter the global marketplace. But selling to consumers in Britain or Brazil involves more than just additional postage: Selling across borders requires an understanding of — and compliance with — transaction taxes that are markedly different from U.S. sales taxes.

The total or landed cost of an international sale typically includes attributing the proper international tariff code to all products and calculating shipping costs, customs duties, import taxes, and either goods and services tax (GST) or value added tax (VAT). In addition to manufacturing, marketing, and selling products, manufacturers that sell globally must get the landed cost right.

Selling internationally offers a world of opportunities. Yet getting global tax compliance wrong can lead to shipment delays, fines, and disgruntled customers, threatening the success of the global channel.

Selling services

The internet is also shaping the manufacturing industry by allowing manufacturers to branch out into new services. IBM, a manufacturing giant, now sells more services than products. Like many other manufacturers, it’s been developing its cloud-based services for years.

That transition has sales tax consequences. Though most state sales and use tax laws target tangible goods, services have historically been exempt. States like South Dakota that are heavily reliant on sales tax revenue already tax most services. States watching their sales tax revenue decline as a result of the rise in the service economy may soon do the same. A growing number of states are looking to tax the services that now comprise “the vast majority of the U.S. economy.”

Sales taxes on services vary widely from state to state, and within states, from product to product. Furthermore, the taxability of services is ever-evolving — like the services these taxes are linked to. Getting it wrong can lead to penalties in multiple states. Getting it right requires vigilance.

Grow with confidence

This is an exciting time for the manufacturing industry: New channels are opening up and opportunities for growth are, well, growing. But to fully benefit from them, manufacturers need to factor sales and use tax compliance into overall plans.

Learn more about the sales tax issues manufacturers confront when entering new channels — and how to best deal with them — in How Tax Compliance Is Changing for Manufacturers. Download it here.