How agentic AI helps manufacturers reduce audit risk

Key takeaways

• Manufacturers who try to manage tax compliance manually could find themselves making the kinds of errors that result in fines and penalties after an audit.
• Agentic AI can help businesses proactively address key pain points that auditors target, including exempt sales and use tax.
• In addition to reducing audit risk, automation can help manufacturers scale with greater ease and focus resources on more profitable initiatives.

Manufacturers face an increasingly challenging tax compliance landscape, thanks to complex indirect tax rules, evolving requirements for exemption certificates, and use tax obligations that can be difficult to understand.

Trying to navigate those challenges requires time and resources, of course. But there’s an even bigger burden potentially lying in wait: an audit. And if your business doesn’t have compliance locked down, you could be at risk of fines, penalties, and a whole lot of frustration.

Think it won’t happen to you? Think again. In a 2021 survey by Avalara and Potentiate, manufacturers had the highest audit rate (18%) among respondents. That’s because taxing authorities know just as well as you do how tough this all is — and they get the most bang for their buck when auditors find errors.

It’s not all doom and gloom, however. Manufacturers today have compliance solutions that are far more powerful than they were even just a few years ago. These save time through automation, enhance accuracy through agentic AI, and reduce the risk of mistakes that can prove costly in an audit.

A purpose-built solution

Avalara Agentic Tax and Compliance™ is part of our purpose-built solution for manufacturers, designed to work in the systems you already use while giving you greater freedom to focus resources on more profitable things.

Of course, by automating your tax compliance to increase efficiency and reduce your audit risk, you can save time and money — which is its own kind of profit.

But before we dive deeper into how Avalara and AI can help your manufacturing business avoid fines and penalties from auditors, let’s address the elephant in the room: the inescapable hype around AI. If you’re skeptical, we don’t blame you. It’s seemingly promoted everywhere these days, regardless of whether it improves a product or service. (There’s even an AI-powered toothbrush, believe it or not.)

Agentic AI isn’t just a buzzword for Avalara, though, and it’s far more than a chatbot or a copilot. There are real benefits for tax compliance because AI agents can handle repetitive or complicated tasks on their own, working across systems and preventing the kinds of errors that can sneak past humans.

Now, let’s take a look at a couple of key spots where auditors often find errors in audits of manufacturers — and how you can proactively protect your business with AI-powered automation from Avalara.

Audit pain point #1: Exemption certificates

Exemptions can be a minefield for manufacturing businesses: Some sales are taxable, some are fully exempt, some are partially exempt. And any exempt sale requires the seller to collect and store a certificate documenting the exemption, with requirements that vary among different states and jurisdictions. (Those certificates expire, too, so you aren’t off the hook even if you get it right the first time.)

Despite this complexity, over half of businesses still manage their certificates manually, according to a 2023 survey. That brings a lot of possibilities into play, and most of them aren’t good: Certificates can be lost or filed haphazardly, making it difficult to provide information during an audit. They can expire without you knowing it, putting you at risk of making exempt sales to repeat customers without the right documentation. And some certificates are invalid because of issues that are easy to miss, such as an incorrect date.

Even if it’s a sale that you 100% know should be exempt, you have to have proof. The tax authorities aren’t about to take your word for it.

That’s why manufacturers who regularly make exempt sales should consider automation. Avalara Exemption Certificate Management covers every step, from validating certificates to storing and organizing them — both lowering the risk of error and the level of effort required to manage it all. Avalara Exemption Certificate Management can:

• Use AI to validate exemption certificates right when they’re received
• Route and store certificates with minimal manual intervention
• Alert you when certificates are about to expire
• Help you retrieve documentation for audits and other needs

It’s proactive compliance that doesn’t just help you when you’re facing an audit — automating your exemption certificate management also means you can scale more easily.

Audit pain point #2: Use tax

Did you know that in an audit, use tax liability is often the largest amount owed? That’s because use tax can be hard to understand — and because businesses often overlook this obligation. (That’s why it’s a common focus in manufacturing audits.)

So what exactly is use tax? Basically, it’s a tax you pay to store, use, or consume taxable property or services — when retail sales tax wasn’t paid on the purchase. For instance, say you buy something from a seller that doesn’t charge you sales tax because they don’t have nexus in your state. You still can be on the hook for tax: In this instance, it’s classified as use tax instead of sales tax.

Rules can vary across states and jurisdictions, but generally, manufacturers owe either sales or use tax on things they purchase but don’t use directly in the manufacturing process.

The fact that use tax is self-assessed means it’s easy to make mistakes, especially if the transaction in question is outside of normal procurement processes or a business has many transactions that span vendors and locations. It’s an area where auditors like to focus their attention because there’s a good chance they’ll find something — particularly if a business has been trying to manage it manually.

Avalara AvaTax for Accounts Payable helps manufacturers navigate use tax and avoid the penalties that can result from misunderstanding it. As part of our agentic AI offering, this solution takes away the confusion and provides end-to-end compliance — from calculating what you owe to filing your returns. Key features include:

• Calculations that factor in the latest rules and rates, product taxability, location, and more
• Liability worksheets for each return to provide oversight and visibility
• Seamless integration with other solutions such as Avalara Exemption Certificate Management
• A repeatable, consistent process that enhances accuracy and reduces your audit risk

An audit doesn’t have to be costly

Audits are a fact of life for businesses, but you can lessen the hassle with automated solutions from Avalara. You’ll be able to respond more quickly. You’ll be more confident, knowing that you’re on top of your exempt sales, use tax, and other challenges. You might even be able to reduce your risk of future audits once regulators see your robust approach to compliance.

With Avalara, you can lower your risk, reduce your frustration, and give your business more room to grow. That’s the power of agentic AI and automation.

FAQ

Do I really need to worry about an audit?

If you’re a manufacturer, yes: 18% of manufacturers in a 2021 Avalara/Potentiate survey said they had been audited, the highest rate among respondents.

What are the biggest audit triggers?

Auditors often find errors with exempt sales and use tax. Managing exemption certificates manually can be challenging, as certificates have different validation requirements in different jurisdictions, and they can expire. Use tax is difficult for many businesses to understand, and often is the largest amount owed in an audit.

Can AI really make a difference in tax compliance?

While AI might feel like a buzzword you can’t escape, it plays a key role in tax compliance automation. It can perform routine tasks such as validating and filing exemption certificates, calculating use tax, and more. That means businesses can dedicate resources elsewhere while enhancing accuracy and reducing risk in the event of an audit.