Sales Tax Liabilities: A Comprehensive Guide for Manufacturers, Distributors, and Fabricators
Sales tax compliance can be a complex and ever-changing landscape, especially for manufacturers, distributors, and fabricators who sell products in multiple jurisdictions. Sales tax liabilities can arise from a variety of activities, including:
- Selling products or services in multiple states
- Having inventory in a fulfillment center in another state
- Leasing property in another state
- Using contractors or subcontractors to do work in another state
- Accepting returns or exchanges on behalf of another location in another state
- Having company-owned trucks making deliveries in another state
- Advertising on local media in another state
- Licensing products, trademarks, or other property to a business in another state
- Under the economic nexus standard, a company may be required to collect and remit sales tax if it exceeds a certain level of sales or transactions in a particular state. Companies conducting online sales or operating across multiple states need to closely monitor their sales activities and ensure compliance with sales tax laws in the jurisdictions where they meet the economic nexus criteria.
To ensure that you are complying with all applicable sales tax laws and regulations, it is important to have a good understanding of your sales tax liabilities. This blog post will provide a comprehensive overview of sales tax liabilities for manufacturers, distributors, and fabricators, and will offer tips for staying compliant and avoiding potential liabilities.
What Is Sales Tax Nexus?
Sales tax nexus is a legal term that refers to the presence that a business has in a state that requires the business to collect and remit sales tax. Nexus can be established in a variety of ways, including having a physical presence in the state, shipping products into the state, or having sales representatives in the state.
If a business has a nexus in a state, it must register for sales tax in that state and collect and remit sales tax on sales made to customers in that state. Sales tax rates vary from state to state, so it is important to make sure that you are collecting and remitting sales tax at the correct rate in each state where you have a nexus.
The Wayfair Decision and Economic Nexus
The Wayfair decision, issued by the United States Supreme Court in 2018, transformed the landscape of sales tax liabilities for out-of-state sellers. Before this ruling, businesses were generally only required to collect and remit sales tax in states where they had a physical presence, such as a brick-and-mortar store or office.
However, the Wayfair decision established a new standard known as economic nexus. It allowed states to require out-of-state sellers to collect and remit sales tax based on their economic activity in the state, regardless of physical presence. Under economic nexus, a business may be obligated to collect sales tax if it exceeds a certain threshold of sales revenue or transactions in a particular state.
This decision significantly expanded the reach of states to impose sales tax obligations on remote sellers, particularly those engaged in e-commerce. As a result, businesses conducting online sales or operating across multiple states need to closely monitor their sales activities and determine if they meet the economic nexus thresholds in each state.
If convicted of underreporting sales tax, the penalties and fines you may receive depend on the laws and regulations of the jurisdiction in which the offense occurred. Depending on the dollar amount and the types of charges filed, whether civil or criminal, you can be looking at imprisonment of up to 30 years as well as hefty fines.
In the aforementioned case, Multani was charged in Peoria and Sangamon counties with one count of theft of property over $1 million and 15 counts of theft of government property over $100,000, all Class X felonies punishable by up to 30 years in prison. He was also charged with three counts of theft of government property over $100,000 and 14 counts of sales tax evasion over $100,000, all Class 1 felonies punishable by up to 15 years in prison. But that’s not all. He was further charged with three counts of sales tax evasion between $10,000 and $100,000, all Class 2 felonies punishable by up to seven years in prison; and one count of wire fraud, a Class 3 felony punishable by up to five years in prison.
As you can see, underreporting sales tax can have bigger consequences than if you had paid the taxes upfront.
Potential Sales Tax Liabilities
As a manufacturer, distributor, or fabricator, your business can face a variety of sales tax liabilities, depending on your activities and the states in which you operate. Some common sales tax liabilities for these types of businesses include:
- Sales tax on sales made to customers in states where your business has nexus. As mentioned before, nexus refers to the connection or presence that a business has in a particular state, such as having a physical location, employees, or meeting certain economic thresholds.
- Sales tax on inventory stored in fulfillment centers in other states. Even if your business does not have a physical presence in a state, you may still be required to collect and remit sales tax if it stores inventory in a fulfillment center in that state. This is because storing inventory in a state may create a sales tax nexus.
- Sales tax on products leased to customers in other states. If your business leases products to customers in other states, you may be required to collect and remit sales tax on the lease payments.
- Sales tax on services performed in other states. If your business provides services to customers in other states, you may be required to collect and remit sales tax on those services.
Tips For Staying Compliant and Avoiding Potential Liabilities
There are several things that your business can do to stay compliant with sales tax laws and regulations and to avoid potential liabilities. Here are some tips:
- Register for sales tax in all states where you have nexus. The Wayfair decision expanded the ability of states to enforce sales tax collection on out-of-state sellers based on economic nexus criteria, as well as the traditional means of establishing nexus.
- Collect and remit sales tax at the correct rate. Sales tax rates vary from state to state, so it is important to make sure that you are collecting and remitting sales tax at the correct rate in each state where you have a nexus.
- File sales tax returns on time and accurately. Sales tax returns must be filed on a regular basis (usually monthly or quarterly). It is important to file your returns on time and accurately to avoid penalties and interest.
- Keep accurate records. You are required to keep accurate records of your sales and sales tax collections for a certain period of time (usually three to five years). These records may be audited by the state tax authorities, so it is important to make sure that they are complete and accurate.
- Consult with a sales tax expert. If you have any questions or concerns about your sales tax liabilities, it is important to consult with a sales tax expert. A sales tax expert can help you to understand your sales tax obligations and to develop a compliance strategy.
- Implement exemption certificate management. Develop a comprehensive plan that includes methods and procedures for managing exemption certificates, collection, and ongoing maintenance.
How We Can Help
Sales Tax DataLINK is a leading provider of sales tax compliance software and services. Our software can help you to automate the sales tax calculation and filing process and to ensure that you are complying with all applicable sales tax laws and regulations. Our CPAs and Accountants are there to assist you with any questions you have and can help you stay on the path to compliance.
If you are looking for a partner to help you stay compliant with sales tax laws and regulations, and to deal with sales tax liabilities, Sales Tax DataLINK is the right choice for you. Contact us today to learn more about our services and how we can help you.