Manufacturers and Sales Tax:
New Channels, New Rules
How growth affects transactional tax compliance for
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.
Manufacturers and Sales Tax: New Channels, New RulesPage 1
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 that can create headaches with new transactional tax
requirements and may require a change in compliance practices.
1. Venturing into ecommerce
More manufacturers are now selling directly to end users through ecommerce. In fact, 70%
of US consumers purchase goods and services directly from manufacturers.1 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
has 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.
Manufacturers and Sales Tax: New Channels, New RulesPage 2
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
2. Going global
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 US, 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,
tax is charged at each stage of distribution on the value added between each transaction.
So while the end user pays US 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. For a 3-minute primer on VAT, watch this video.
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 US 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, instead opting 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 US 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 their
business in ways previously unavailable.
Manufacturers and Sales Tax: New Channels, New RulesPage 3
3. Selling more services
Customers increasingly expect purchases to be the beginning of a long-term relationship
with vendors. To that end, services are playing an increasingly significant role in
manufacturing.2 Some companies, like IBM, now sell more services than the products. 3
Others use outsourcers or contractors to provide after-sale services to customers.
The growing importance of services in the US 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 are 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.
2 McKinsey 3
Manufacturers and Sales Tax: New Channels, New RulesPage 4
To learn more about pricing,
view online demonstrations,
or chat about AvaTax’s
A privately held company, Avalara was founded by a team of tax and software industry veterans to fulfill a vision of delivering an affordable, scalable sales tax
solution. Thus making what was not economically feasible in the past for mid-sized business not only affordable, but more accurate as well — all with the latest and
most innovative technology available. From Bainbridge Island, close to Seattle, Avalara’s knowledgeable staff works tirelessly to help customers put the hassles of
sales tax compliance out of mind. Avalara’s mission is to transform the tax process for customers by creating cost-effective state-of-the-art solutions. The company
does so through integrated on-demand, Web-based software services that provide transparent transactions, accurate tax compliance, painless administration
and effortless reporting.
Avalara has 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!