How manufacturers can approach evolving sales tax management

Avalara Whitepaper

How growth affects sales tax compliance for manufacturing companies

For the past few decades, manufacturing has pursued growth with nearly myopic focus on efficiency. Lean production drove down the costs of goods sold and eliminated operational waste, delivering a clear and measurable impact on profit margin. Lately, these traditional methods for squeezing efficiency out of the manufacturing process have become more commonplace, making growth more difficult to achieve.

New strategies are emerging among manufacturers to create value where they traditionally never thought to look for it. These new strategies may soon become rote as well, but first manufacturers must resolve the new compliance obligations they bring on. Three increasingly common strategies in particular can create headaches with new transactional tax requirements and may require a change in compliance practices.

The impact of ecommerce on sales tax compliance

More manufacturers are now selling directly to end users through ecommerce. Customers love the ease of ordering parts and labor online and you love the increased profit margin of direct purchases. But cutting out the middleman isn’t without complications, putting added pressure on your business to manage a quality web-based customer experience and comply with new tax obligations when not selling through exempt resellers.

Manufacturing has traditionally been a tax-exempt business. But once customers can order or purchase products and services directly from you, you’ve crossed over into retail tax territory. Acting like a retailer means thinking like a retailer, both in how you treat customers and sales transactions. Now, along with collecting valid exemption certificates for non-taxable sales, you need to keep track of taxable sales as well.

Most goods (and several services) are taxable in 45 states and 12,000 jurisdictions in the US. Depending on where customers are located and where you have a business presence (inventory, warehouses, employees), you could have an obligation to register and collect sales tax in multiple states based on sales activities. This connection is called nexus and many of the activities involved in ecommerce — online marketing, digital advertising, distribution, and fulfillment — can create it, as can selling through marketplaces like Amazon (B2C), Amazon Business (B2B), and Amazon Global (International).

Furthermore, stalled efforts by Congress to update federal online sales tax legislation have led states to reinterpret nexus rules to their benefit. More than two dozen states now have affiliate and/or click-through nexus aimed at capturing sales tax from internet sales and online marketing activities. Certain states have also introduced economic nexus, which bases the obligation to register, collect, and remit sales tax solely on sale revenue or transaction volume in that state.

Selling directly to customers may feel like an entirely new business to manufacturers accustomed to selling through resellers. Reassuringly, many of the business processes, including tax compliance, that make selling through new channels prohibitively difficult can now be automated into your ecommerce system, existing ERP, or other financial system.

Global expansion leads to tax management expansion

The ease with which manufacturers can now deliver raw materials and finished products to others parts of the world has made international expansion easier. But doing business across international borders can complicate tax compliance as the rules are vastly different from those of the United States. In the U.S., sales tax is charged at the final point of sale on the full retail value of the product. Under the value-added-tax (VAT) system, is charged at each stage of distribution on the value added between each transaction. So while the end user pays U.S. sales tax, multiple parties involved in the supply, manufacturing, distribution, resales, and retail sale of goods are responsible for paying a portion of VAT along the supply chain.

When VAT, goods and services tax (GST), and import duties or special tariffs are added together, the total expense for shipping goods internationally is the landed cost.

While markedly different from sales tax, complying with VAT and landed cost requirements can be equally complicated and risky if you’re not certain of your obligations or familiar with foreign tax laws. Determining place of supply (which country’s VAT is charged and paid) isn’t always easy, especially if services are part of the transaction. This Gov.UK article provides more details.

Much like U.S. tax, get VAT or landed cost wrong and the consequences can be dire: customs delays, increased scrutiny from taxing authorities and auditors, even costly fines and penalties. Many manufacturers don’t even try, and opt instead to use intermediaries or export agents to facilitate the transaction and handle the paperwork. While this reduces the onus on the company to manage international tax compliance, it adds to the cost of international sales and reduces profit margins.

By automating VAT and landed cost in addition to U.S. sales tax, manufacturers can free themselves from the concern of handling these administrative compliance tasks themselves. Adding this functionality to your financial or accounting system can allow manufacturers to explore partnerships with vendors more directly and streamline business in ways previously unavailable.

State authorities impose taxes on services too

The growing importance of services in the U.S. economy has caught the attention of the states as well. Whereas previously sales tax was almost always limited to tangible personal property, more states are now taxing services. Eighteen states and growing now tax at least some services. Many of these services are part and parcel of most manufacturing transactions, including installation, repair and maintenance, and leasing of equipment, making the industry a major target of these new rules. The sourcing rules for determining obligations can be tricky, especially if you have contractors or outsource these services to third parties.

Furthermore, states tax these services differently, including where those services were performed. Crossing state lines to perform the work is enough to constitute nexus; using third-party vendors to do repairs and installations can also create nexus, depending on each state’s nexus thresholds.

Keeping track of these rules is crucial to compliance, which is why automating transactional tax obligations has become so common among manufacturers.

Grow confidently with sales tax automation

You can’t be a tax expert in every state and every country. You shouldn’t even try. A better alternative is to be more efficient in how you handle tax compliance in your existing business systems. Invest in solutions that will grow and scale with your business to handle new sales channels like ecommerce and international expansion.

Tax automation software like Avalara integrated into your ERP or ecommerce system allows you to better manage taxable and exempt transactions and optimize production, inventory, order management, distribution, and fulfillment.

AvaTax is the most powerful tax engine available in the market with real-time tax rates and rules for millions of products and services and 70,000 taxing jurisdictions worldwide. Precise address verification and geolocation technology is down-to-the-rooftop accurate so invoices are correct and shipments are on time. Audit protection is built in and guaranteed. Pre-built connectors to 500+ ERP, ecommerce, and billing systems means no costly integrations or lengthy deployments. Global tax content and expertise means you can expand and explore strategies confidently in both domestic and foreign markets without the added costs of brokers or intermediaries. Avalara’s software suite extends to the full cycle of compliance — calculations, exempt sales and certificate management, filing and returns.

Discover what 20,000 other companies already know: Avalara is the only way to manage transactional tax and be certain you’re doing it right. Check the box on compliance: you’re good to grow!

Reduce tax risk

Increase the accuracy of your tax compliance with up-to-date rates and rules with our cloud-based tax engine.