The manufacturer’s guide to navigating tax compliance with agentic AI

Key takeaways

• Manufacturers face extraordinary complexities related to tax compliance: They might need to manage sales tax, use tax, exemptions, international sales, property tax — or all of the above.
• For each of those challenges, jurisdiction differences complicate things even further. Rules, rates, and requirements vary widely across countries, states, counties, and cities, and they change frequently.
• Avalara has a purpose-built solution for manufacturers, utilizing the power of agentic AI to help these businesses reduce risk, increase efficiency, and gain a competitive advantage.
   

For manufacturers, a complex tax landscape

Almost no business gets off easy when it comes to taxes, but manufacturers face some unique challenges — because tax complexity impacts just about every stage of the manufacturing process, from procurement and production to distribution.

There’s sales and use tax. Property tax. For international shipments, taxes like VAT and GST. If you sell direct to consumers, you’ve got to worry about things like economic nexus thresholds. If you sell to resellers or other exempt buyers, you have to manage exemption certificates. And if you have operations or customers across different jurisdictions, you’ve got to deal with a maze of varying rules and regulations.

That’s a lot to figure out and track, especially when you consider none of it is set in stone — the tax compliance landscape is constantly changing. It’s no wonder manufacturing companies reported the highest audit rate (18%) in a 2021 survey conducted by Avalara and Potentiate: Auditors know this is hard, and they tend to go where they think they’ll find errors and compliance issues.

If you’re a manufacturer, what do you need to know? And how can you stay on top of compliance? Let’s dive a little deeper into some of the most common issues you might face, and what you can do to increase efficiency and reduce risk.
 

Sales and use tax

Almost everyone gets the concept of sales tax, but if you don’t quite fully understand use tax, you’re not alone. Use tax is a tax on the storage, use, or consumption of property or services when retail sales tax wasn’t paid as part of the purchase. Businesses are constantly overlooking this obligation, which can lead to penalties, cash leakage, or unexpected liabilities. (Use tax is a major audit focus for manufacturers, and it’s not uncommon for use tax liability to be the largest amount owed in an audit.)

Here’s a scenario that illustrates how use tax (and taxability) can vary. Say your company buys a pallet of parts that are intended for resale. That’s typically exempt from sales tax, because the tax will eventually be collected down the line when you sell the goods. But what if you end up using those parts for your own operations instead of selling them? You don’t get to skip the tax: You essentially became the consumer, so use tax potentially comes into play.

Of course, because seemingly nothing can be easy when it comes to compliance, there are wrinkles in that scenario. Were those parts used to build manufacturing equipment? In some states, they may not be taxable. Were they used to repair manufacturing equipment? Now they might be taxable, even in some of those same states. And that’s just the tip of the iceberg.

There’s good news, though: You might be eligible for a use tax exemption on your purchases of machinery and equipment — that is, if you can figure out whether you qualify. These exemptions are for equipment directly used in the manufacturing process, but a common requirement is that the equipment must be involved over 50% of the time. Some states only offer the exemptions for equipment that’s part of a new operation, or an expansion of an existing one, which means replacement machinery wouldn’t be eligible. Confused yet? We don’t blame you.
 

Exempt sales and documentation

In addition to figuring out their own exemptions, manufacturers that make exempt sales face significant compliance hassles on that front as well: Those sales require exemption certificates, and it’s the responsibility of the seller to gather and manage them.

Just like other tax regulations, the rules around exemption certificates vary by jurisdiction, so making sales in different states only adds to the complexity. Sellers need to make sure the certificates are current, valid, and stored properly so they can be found when an auditor requests them — missing certificates are a leading cause of fines in sales tax audits.

Businesses that try to manage certificates manually are playing with fire. Employees don’t always know what to look for to ensure a certificate is valid. They can lose forms or file them haphazardly. They likely won’t remember when certificates are about to expire. All these issues can create the risk of fines and penalties, but beyond that, they can cause sales delays, credit/rebills, and other issues. (You also need to provide the right certificates to the vendors you purchase from; otherwise, you’ll put them at risk.)
 

Property tax

Similar to the compliance challenges above, property tax for businesses includes a vast assortment of laws, rates, due dates, and filing requirements. And those aren’t only on the state level — property taxes can be levied by smaller jurisdictions such as counties. Real property tax is charged in all 50 states on land, buildings, and permanent fixtures; personal property tax, charged in 43 states, is for items used in business that are not permanently affixed to land.

Complexities abound here as well. For instance, manufacturers’ machinery and equipment have different depreciation schedules and classification rules that can vary by jurisdiction. If equipment is not currently in use, its assessed value might be reduced in some jurisdictions, but not others. And speaking of value, if you don’t know what to look for or how to appeal, you might be paying too much in tax due to inaccurate assessments.

To make things even more fun, much of this is paper-based, which means watching the mail. (And printing and mailing returns in many instances.) Large companies with operations in many different jurisdictions can be faced with thousands of these physical notices and bills, and tracking them manually isn’t just inefficient — it can be nearly impossible.
 

Manufacturing a solution

Avalara has a purpose-built solution that allows manufacturers to focus more on what they do best — design, production, sales, and distribution — while powerful agentic AI technology keeps the tax compliance machine humming.

This goes beyond traditional automation, with autonomous AI agents that work in the systems you already use, perform tasks such as gathering, organizing, and analyzing data, and even delivering insights to support your business.

Your exemption certificates? Validated, organized, and at the ready should an auditor come calling. Sales and use tax? Your agent can file and remit for you — and they know when a rate or rule changes too. Property tax? It’s all under control, no matter how many jurisdictions you need to file in or how unique your situation is.

Avalara Agentic Tax and Compliance™ can even help with global sales, ensuring you stay in compliance with HS code requirements, VAT rules, and more.

And while you’re streamlining your compliance, reducing your audit risk, and freeing up resources for more strategic initiatives, you’ll be doing something else: giving your company a competitive advantage.

Learn more about Avalara Agentic Tax and Compliance and our manufacturing solution today.
 

FAQ

Why is tax compliance so complex for manufacturers?

It’s largely because tax impacts nearly every stage of the process for manufacturers — including procurement, production, distribution, and others. These businesses may need to manage sales and use tax, property tax, international regulations, and exemptions.

What is the biggest compliance challenge?

That depends on the specific business and their operations, but any manufacturer that operates in multiple jurisdictions needs to manage different regulations and rates across locations — regulations and rates that can change at any moment.

Are manufacturers at high risk for audits?

According to manufacturers themselves, yes: In an Avalara and Potentiate survey, manufacturers reported the highest audit rate at 18%.

How is it possible to stay on top of compliance challenges?

Avalara has a purpose-built solution for manufacturers, designed around their unique needs. Using the power of agentic AI, the solution automates tasks like tax calculations, filing and remitting, exemption certificate management, and more.