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Manufacturers and distributors: Size up your sales tax obligations state-by-state

In Wayfair, the U.S. Supreme Court eliminated the sales and use tax physical presence nexus as a requirement. States may now freely add economic nexus to sales tax obligations. Any company making sales to customers in states outside of its "home" state could be subject to additional sales and use tax registration, collection, and remittance obligations in states where they may not be currently filing.

Nexus as well as product and services taxability rules are changing in many states, which could affect who is taxed and how, including exempt supply chain transactions. While manufacturers and distributors (manufacturers) have historically been exempt from sales and use tax, they too may now have broader sales tax obligations that require transaction tax management.

Manufacturers are among the top five most heavily audited industries (Avalara). Areas that can trigger costly audits include drop shipping, exemptions, use tax, and nexus.

As new requirements roll out state-by-state (keep track here), manufacturers may have sales tax obligations that require various actions including:

  • Registration filing requirements. Who files where is wide open these days, and manufacturers may no longer be exempt in areas where they do business.
  • Collect the tax or get the doc. Until more guidance is forthcoming from individual tax jurisdictions, manufacturers should consider collecting resale or exemption certificates on qualifying sales. Moreover, missing or invalid exemption and resale certificates could trigger an audit and fines on top of any uncollected tax. 
  • Implement a strong transaction tax management system to manage registration and filings, sales and use taxes, exemption and resale certificates, supplier channel invoices, and other state and local tax requirements.
The takeaway
 
With changing laws, evolving exemptions, multiple reporting requirements, and varying rates, sales and use tax compliance is only becoming more onerous on businesses, not less. The complexity of record-keeping for exempt transactions, remitting taxes and filing required forms accurately and on time is continuing to ratchet up, despite efforts in a number of states to simplify sales tax (see State tax reform is worth the effort).

Protect your business investments with a sales and use nexus review: 

  • Establishing your nexus footprint
  • Updating taxability
  • Evaluating tax technology updates needed
  • Assessing return accuracy
  • Recommending process improvements for exemption and resale certificate collection and retention

Request a free consultation with Judy Vorndran, TaxOps' lead state and local tax partner, to see how best to shore up your tracking systems to reduce errors and audit risk. 

Let's talk tax

Judy Vorndran can be reached at jvorndran@taxops.com or 720.227.0093. Follow Judy on LinkedIn.

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