Top 5 ways manufacturers can avoid US sales and use tax problems
Managing sales tax may sound easy, but for manufacturers, sales and use tax compliance can be like peeling an onion: after you handle one issue, there always seems to be another layer of complexity
Let’s look at 5 different ways manufacturers can streamline their sales and use tax compliance.
1. Know where you should register for sales tax
Whether you need to register and then collect and remit sales tax in a jurisdiction depends on nexus, which is a connection that establishes a tax obligation with a taxing jurisdiction like a U.S. state.
Nexus can be affected by a variety of factors. Having a physical presence in a state always creates nexus, and businesses with no physical ties to a state can establish nexus through economic activity in a state or economic nexus. All 45 states with a general sales tax have economic nexus, as do Washington, D.C., Puerto Rico, and some parts of Alaska (which has local sales tax but no state sales tax).
How you make deliveries in a state can also impact nexus. For example, delivering in your vehicle usually establishes a sales tax obligation, while delivery via a common carrier doesn’t. Using a third-party delivery service may create nexus, as can selling through marketplaces; having inventory in a state generally gives you a physical presence in a state.
You can establish nexus with a state even if you only make exempt sales in that state. However, once you have nexus, you must register for sales tax and file returns as required by law. Many states require businesses to file returns even with no sales tax to report. Once you’re registered in a state, you need to validate your exempt transactions or risk being liable for the unpaid tax.
2. Stay updated on sales and use tax rates and rules across jurisdictions
Once you’ve determined you are obligated to collect and remit sales tax in a state, you need to assign the proper sales tax rate to each transaction. It’s a big job. There are more than 13,000 sales tax jurisdictions in the United States between states, counties, cities, and special taxing districts. Missouri alone has approximately 2,000 different local tax districts.
In most states, sales tax rates are based on the delivery address. The more you can pinpoint an address, the better; using ZIP codes to determine sales tax rates can lead to errors.
Rates can also vary by product. For example, some states provide an exemption for diapers or food purchased for home consumption. In home-rule states, where local governments have greater taxing authority, a product may be exempt from the state sales tax but subject to local sales tax — or vice versa.
3. Create a consistent, repeatable process even as product categories multiply
Failure to properly research product taxability can lead to the wrong sales tax rate application. The 2020 pandemic crisis has created shifts in consumer behaviour, directly impacting the manufacturers. The new opportunities created have led to high-demand product lines.
As manufacturers step toward expanding their product lines, it is important to have automated sales and use tax solutions connected to product and service types and localities.
4. Record exempt sales
Manufacturing inputs are often exempt from sales and use tax, and exemptions usually need to be validated with an exemption certificate. The exemption certificate proves to the seller that tax will not be charged. Collecting, storing, and renewing exemption certificates is an enormous pain point for manufacturers and a frequent source of negative audit findings.
5. Remit accurate sales tax returns
Accurately managing sales tax compliance has never been an easy task. It may be incredibly daunting to manage multiple due dates and filing schedules if you are a business owner dealing in multiple states and local jurisdictions.
The advent of the coronavirus pandemic has also created a whole set of challenges. Some U.S. states and local taxing authorities provided sales tax relief at the outset of the pandemic, especially for small businesses, but such programs have expired. So it’s now incumbent on companies to get sales tax right.
The risk of non-compliance: Do manufacturers charge sales tax?
Sales and use tax compliance is becoming increasingly complex for manufacturers. The pandemic has forced many manufacturers to develop new supply chains that could create nexus in a new location. In addition, manufacturers increasingly sell directly to consumers, meaning they’re responsible for collecting and remitting sales tax as state and local laws require. And as always, manufacturers must deal with thousands and sometimes hundreds of thousands of exemption certificates.
Having an automated sales and use tax software solution by Avalara can help your sales and tax teams to work more efficiently and strategically and help solve the above challenges.
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