Running a manufacturing business? Don’t sweat sales tax filing! Even though raw materials are often exempt, many manufacturers assume they don’t need to file returns. Laws have changed resulting in manufacturers needing to be registered and non-compliance can lead to big penalties and unwanted expenses down the road.
The good news? Sales tax reporting doesn’t have to be complicated or burdensome for manufacturers. By understanding common sales tax obligations (such as exemption certificates and resale certificates) and by working with a specialist, you can easily stay compliant and avoid unnecessary and exceedingly costly audits.
While many sales to customers are exempt, manufacturers still owe sales tax in certain scenarios:
- Taxable sales to end consumers – Any direct sales of finished products to customers are likely taxable.
- Taxable services – Many services like consulting, installation, and equipment repairs are subject to sales tax.
You’ve figured out what you need to pay sales tax on, but now you need to determine which types of exemption and/or resale certificates your business needs –this can be complicated and daunting. Here are some examples of exemption certificates: resale exemption certificate, agricultural exemption certificate, industrial production exemption certificate, interstate commerce exemption certificate, direct pay certificate, contractor exemption certificate, and utility exemption certificate. Each certificate exempts certain businesses from paying sales tax on purchases that qualify based on how the items will be used.
For example, the resale exemption certificate allows wholesalers and retailers to buy inventory tax-exempt that they will later resell. The industrial production exemption certificate exempts manufacturer’s purchasing equipment used directly in the manufacturing process. Furthermore, the agricultural exemption allows farmers to purchase farm equipment, seeds, livestock, and more tax-free.
There are elaborate rules around these exemptions, so be sure you only provide certificates when appropriate and keep thorough documentation. These tax exemptions can save your business a lot on purchases when used properly.
Now let’s cover resales certificates briefly. A resale certificate exempts a transaction because it will be resold. Sounds simple, right? Not exactly. There are many types of resale certificates. Let’s talk about a few examples.
The blanket resale certificate provides ongoing verification of your resale status for all future purchases. The single purchase certificate exempts just one transaction that will be resold. Some states may issue resale permits authorizing tax-free purchasing instead of certificates. Affidavits, waivers, or declarations signed by the purchaser also suffice in select states. For multistate businesses, the Multijurisdictional Uniform Sales and Use Tax Certificate acts as a standardized resale certificate. Various states allow temporary single-use certificates as well. Lastly, combination certificates merge resale status with other exemption reasons.
Regardless of the format, documentation is critical to verify the sale is for resale and exempt from tax. Keep resale certificates, permits, and affidavits organized and accessible in case of an audit. With proper documentation, these certificates allow wholesalers to purchase tax-free (as well as keep you out of trouble with the auditor!)
Managing multi-state sales tax seems overwhelming considering many manufacturing businesses have nexus in one or two states making the potential penalties for non-compliance very costly. States are increasingly aggressive about pursuing unregistered businesses.
The most threatening scenario is getting audited after years of non-registration. The statute of limitations can go back many years—much greater than the traditional 3-year review. While the audit itself can result in taxes due, penalties, and interest, the bank-crushing cost is managing the audit. Businesses can spend tens of thousands to support the audit through tax attorneys and CPAs. Some states even have punitive penalties to punish businesses for non-registration. The penalty can be 50% for a business that knew they should register and did not.
Is that a risk you are willing to take? Our experienced team can handle your registrations, monthly filing, and audit support for only $42 per return, which is a lot less than $20,000!
Sales Tax DataLINK
Sales tax compliance doesn’t have to be a headache for manufacturers. With the right help, you can file returns with confidence and avoid sales tax nightmares. Our experts at Sales Tax DataLINK specialize in multi-state manufacturing sales and use tax filings.
We pride ourselves on staying current on changing sales tax laws in all taxing jurisdictions and leveraging automation to ensure accuracy. We promise to act as your outsourced sales tax department so you can focus on growing your manufacturing business.
Still not convinced? Contact us today for a free consultation to see how we can simplify sales tax filing and protect your business and your bank account. Don’t take risks with compliance – our comprehensive services provide sales tax expertise and support your business needs at an affordable cost.