Sales Tax Management and Compliance are complicated and one of the biggest obligations for manufacturers and distributors in the US. Complexities in sales tax regulations, state-wise tax rates, and ever-changing policies add to the complexity of tracking and documenting each transaction in order to remain fully compliant. A single misstep can lead to huge penalties and additional burdens on the finance team to get it corrected and remain compliant.
What are the key Sales Tax Compliance Challenges for Manufacturers?
Determining Nexus
Manufacturers are required to determine their nexus which is finding out their filing obligations in a particular state based on their presence there. It can be tedious and complex as they will have to analyze their economic activity, physical presence, presence through affiliates, and other factors in that particular state. Each of these factors dictates whether a manufacturer is required to collect and remit sales tax in that state. Apart from this, customers also get impacted as they are the ones who will be charged correctly or incorrectly based on the nexus determination.
Multi-state Operations
Manufacturers operate in multiple states that in turn require them to comply with respective sales tax regulations in those states. In order to remain compliant, they have an uphill task of tracking each transaction and classifying them based on varying tax rates, rules, and exemptions for each state. Without a proper ERP system, they are bound to err on crucial tax calculations leading to improper tax collections and thereby inviting hefty penalties.
Product Taxability
Manufacturers have different product lines and they are required to determine which products are subjected to sales tax and which ones are exempt. Also, these differ from state to state making the entire task complicated. Some states exempt certain products while some tax them. This also impacts the overall pricing of a product leading to changes in sales and marketing strategies.
Exemption Certificates
Manufacturers purchase raw materials, parts, and equipment for their production operations. In order to become exempt from paying sales tax on each of the purchased items, they need to obtain and manage exemption certificates. In the absence of an ERP, this is a tedious and time-consuming process. Also, it demands accurate record keeping and ensuring zero mistakes when applying for exemption certificates.
Sales Tax Changes
Sales tax rates and regulations are subjected to frequent changes at the local and state levels. Manufacturers have to stay up-to-date with these taxation changes to ensure they are collecting and remitting the correct amount of tax. This can be challenging for manufacturers who have footprints in many states and even outside the country.
E-commerce Sales
E-commerce has enabled manufacturers to sell products directly to customers across the US and to other countries. This can lead to complexities in the form of inter-state and inter-country sales tax collection and compliance reporting.
Audit Compliance
Manufacturers have to intensively prepare for sales tax audits by local and state tax authorities. Audit preparation is a time-consuming, cost-intensive, and disruptive affair where the manufacturer has to prepare by ensuring all receipts, invoices, and relevant sales tax documents are in place. In the absence of a capable ERP, manufacturers can find it very difficult to ensure proper documentation leading to non-compliance and additional financial impact in the form of penalties and interest.
Conclusion
Yes, Sales Tax Compliance is tough! However, manufacturers can address these challenges with the help of capable ERP software. An ERP can help them keep up-to-date records of each sales transaction done across states and countries. It can help them be audit-ready with its in-depth documentation, reporting, and record-keeping capabilities. They can easily manage complexities related to ever-changing state-wise sales tax rates and exemptions. In all, an ERP can help them be proactive, well-informed, and adaptable to the excruciating demands of sales tax regulations and compliance.
Stay tuned for our next blog on how you, as a manufacturer can tackle these challenges in detail.
