On June 21, 2018, the sales and use tax nexus landscape changed for all businesses by the U.S. Supreme Court ruling in South Dakota v. Wayfair.
This ruling held that a state could mandate an out-of-state or remote seller to collect and remit sales tax on those sales delivered into the state, even if the seller has no physical presence in the state. The post-Wayfair effect on manufacturers has been most notable, as the entire industry is dealing with the additional reporting and compliance requirements for their purchases and sales.
Ongoing Compliance and Monitoring
Manufacturers should re-evaluate their sales tax collection and compliance requirements to each state’s specific economic nexus rules. Resources are needed to keep abreast of the ever-changing tax laws in the states, as well as to ensure tax exemption certificates are timely received, validated, and retained. Manufacturers may be finding that their suppliers are charging them sales tax for purchases that were previously not taxable. For example, California’s partial sales tax exemption provides, in essence, that qualifying manufacturers can pay a reduced sales or use tax rate on qualifying equipment purchases and leases. To be eligible for this exemption, the manufacturer must purchase qualified tangible personal property, and use the tangible personal property in a qualified manner.
Exemptions from Sales Tax
While generally the manufacturing process starts upon the receipt of raw materials, the process requires that the raw materials go through the refining and fabricating cycle in which the output is an altered yet completed product. Since the raw materials purchased are exempt from sales tax, manufacturers may need to add resources to and scrutiny of their accounts payable department to verify that their suppliers are not erroneously charging sales tax on these purchases.
Alternatively, suppliers may be uncertain as to whether sales of exempt raw materials constitute a transaction for economic nexus purposes, as that state’s economic nexus threshold may vary from one state to the other. Should a supplier meet the economic nexus threshold requirements, it is required to collect resale and/or exempt certificates in each state it has nexus requirements. Even if a manufacturer has addressed the compliance and administrative tasks necessary to stay current of their sales tax responsibilities, there are still areas of the tax law where manufacturers are not certain on the positions taken by a specific state especially if the state is not as friendly to the manufacturing sector like California.
contact a member of Withum’s Tax Services Group to explore your options and compliance needs further.
The Path Forward
While Wayfair and subsequent tax law changes have had a significant effect on the way businesses operate, manufacturers must monitor tax law changes for state-specific legislation to adapt quickly and effectively. A manufacturer’s supply chain, long-term growth plan, and deal transactions are all areas potentially impacted by changes in the tax law.