The hidden cost of use tax: What manufacturers need to know about compliance complexity

For most manufacturers, consumer use tax isn’t a topic that gets a lot of airtime in leadership meetings. Instead, it’s traditionally relegated to a back-office accounts payable (AP) process. Buried under fragmented spreadsheets, disparate ERPs, and disconnected purchasing systems, use tax compliance remains largely unmonitored until an audit notice arrives.

This lack of visibility can create substantial exposure in indirect tax audits. Unaccrued consumer use tax frequently represents the single largest deficiency assessment on a manufacturer’s final audit report.

These costly audit findings persist despite the massive manual effort finance teams dedicate to tracking purchases. When an audit concludes, under-accrued tax from vendor purchases frequently results in the largest single amount owed. Ultimately, the problem is not a lack of team dedication; it is an overwhelmingly complex compliance system that manual processes simply cannot conquer.

• Traditional AP tools fail under manufacturing complexity. Spreadsheets, legacy ERP tax tables, and manual review processes are fundamentally unequipped to handle usage-based taxability and intercompany inventory transfers.

• Manual processes create dual financial leakage. Without dedicated automation, manufacturers face significant financial exposure from both under-accrued use tax and unrecovered cash from use tax overpayment.

• Integrated automation converts risk into an advantage. Utilizing purpose-built platforms for accounts payable, tax research, and exemption certificate management shifts compliance from a reactive administrative burden to a proactive, audit-ready operations model.

Unlike sales tax, which is collected and remitted at the point of sale by the seller, use tax is self-assessed by the buyer. If a vendor doesn’t charge sales tax on a purchase, perhaps because they don’t have nexus in the buyer’s state, it’s the manufacturer’s responsibility to identify the obligation, calculate the amount, and remit it to the appropriate jurisdiction. This doesn’t happen automatically, and in the absence of a reliable system, it often doesn’t happen at all.

For manufacturers, this challenge is compounded by the sheer complexity of their purchasing activity. Raw materials, maintenance and repair supplies, capital equipment, and office purchases may each have different taxability rules depending on the state, how the item is used, and where it ends up in the production process.

To manage this compliance risk, manufacturers must navigate several highly specific operational scenarios:

• Usage-based taxability. An identical bolt can be tax-exempt in one context, such as being incorporated into a finished good for resale, and taxable in another, if it’s used to repair equipment on the factory floor. As the Connecticut State Department of Revenue notes, a determination of the proper rate of tax is dependent on the type of item purchased and how and where the manufacturer will use it.

• Intercompany transfers and storage. Intercompany transfers create additional exposure. When components move between plants across state lines, some states impose use tax on those transfers. The same applies when finished goods are stored in a warehouse in a new state, as the storage itself can trigger a tax obligation.

• Direct pay permits. Direct pay permits add another layer, requiring manufacturers to track and self-assess tax on every qualifying purchase with meticulous accuracy.

In practice, businesses frequently overlook their use tax obligations, which can lead to penalties, cash leakage, or unexpected liabilities. With rules varying across more than 12,000 U.S. sales and use tax jurisdictions and changing frequently, manual approaches simply cannot keep pace.

Traditional accounts payable workflows are fundamentally unequipped to handle the intricate tax rules of modern manufacturing. Spreadsheets, legacy ERP tax tables, and reliance on vendor-charged tax weren’t built for this level of complexity. Without a purpose-built system, two very common scenarios go largely undetected:

• Undercharging. When a vendor charges too little tax, or none at all, the compliance responsibility shifts entirely to the buyer.

• Overcharging. When a vendor overcharges, money quietly leaves the business that could otherwise be recovered.

To address this gap directly, Avalara AvaTax for Accounts Payable connects to AP, procurement, and ERP systems to evaluate every purchase transaction. It automatically compares what the vendor charged against current tax rules across jurisdictions, factoring in product taxability, exemption status, and cost center rules.

With this automated evaluation, the platform handles both invoice discrepancies:

• When a vendor undercharges, it accrues the use tax automatically.

• When a vendor overcharges, it flags the discrepancy so manufacturers can recover overpayments.

The result is an audit trail that documents every decision in plain language, which is a critical capability when auditors ask questions.

Knowing what tax is owed is only part of the challenge. Understanding why, and defending that determination to a state auditor, requires timely and accurate tax research.

Avalara Tax Research gives AP and tax teams plain-language answers to jurisdiction-level taxability questions. According to a 2026 Forrester Total Economic Impact™ study, organizations using Avalara Tax Research achieved a 90% efficiency gain. This saved an average of 18 hours per month and $35,000 in labor costs, which freed senior tax resources to focus on higher-value strategic priorities.

On the documentation side, compliance requirements present equal risks across two main fronts:

• Exempt sales (the sales side). Invalid, expired, or missing certificates on exempt sales are consistently among the top findings in manufacturing audits. Avalara Exemption Certificate Management automates the collection, validation, and renewal process, ensuring certificates are current and properly matched to the transactions they support.

• Exempt purchases (the procurement side). Avalara Vendor Exemption Management extends this protection to your purchasing workflows. This enables manufacturers to automatically supply their own exemption certificates to sellers, preventing tax overpayment from the start.

Avalara’s Agentic Tax and Compliance™ platform brings AI agents into the tax workflow to automate critical compliance tasks, including:

• Calculating use tax across jurisdictions

• Validating exemption certificates

• Detecting invoice and transaction anomalies

• Improving continuously as purchase patterns change

Unlike static rule-based systems, these agents adapt dynamically to the shifting purchase volumes, vendor relationships, and jurisdiction rules that create compliance gaps in manual environments.

By leveraging these advanced automation capabilities, businesses can dedicate resources elsewhere while enhancing accuracy and reducing risk in the event of an audit. For accounts payable teams managing high-volume procurement across multiple states, the shift from reactive to proactive compliance is the difference between managing risk and discovering it during an audit.

While consumer use tax will never be simple for manufacturers, the right automation ensures it no longer has to be a major business liability.

To learn more about how to streamline your operations, visit our manufacturing tax compliance solutions page.