In the past few years, the sales tax nexus landscape for manufacturers has undergone a dramatic transformation. The landmark 2018 Supreme Court decision in Wayfair v. South Dakota shook the foundation by allowing states to require sales tax collection from remote sellers, even without a physical presence. This has significant implications for manufacturers, many of whom operate across state lines and may not have considered the sales tax implications of their activities.
Beyond Wholesale: The Nuances of Economic Nexus
While manufacturers traditionally focused on wholesale transactions with resellers, the concept of economic nexus throws a wrench into this simplified view. Economic nexus establishes a sales tax collection obligation based on a business’s economic activity within a state, not just physical presence. Here’s why manufacturers need to pay close attention:
- Threshold Variations: Each state defines its economic nexus thresholds differently. Some states, like South Dakota (the state in the Wayfair case), consider only taxable sales (direct sales to consumers) when determining nexus. However, other states, like Washington, take into account all sales, including wholesale revenue. This means a manufacturer with primarily wholesale sales in Washington could still surpass the threshold based on their total revenue and be on the hook for sales tax collection on taxable sales.
Example:
Acme Widgets, a widget manufacturer based in California, makes most of its sales to distributors in various states. However, Acme Widgets also sells replacement parts directly to consumers online. Let’s say Acme Widgets surpasses the $100,000** total sales** threshold in Washington state (including both wholesale and direct-to-consumer sales). Since Washington uses all sales for nexus determination, Acme Widgets would be required to register, collect sales tax on their direct-to-consumer sales, and potentially file sales tax returns in Washington.
Blurred Lines Between Wholesale and Retail
Another key consideration is the proper classification of transactions. What a manufacturer might consider a wholesale transaction (selling replacement parts online) could be seen as retail from a sales tax nexus perspective. Manufacturers need to be mindful of these distinctions and how they might affect their nexus obligations in each state.
Click-Through Nexus: A Fading Presence, But Still Relevant
While economic nexus dominates the scene, a handful of states still cling to “click-through nexus” laws. These laws establish nexus based on a virtual connection, such as:
- Affiliate Marketing: If a manufacturer utilizes affiliate marketing, where commissions are paid for clicks that direct customers to their website, those clicks could trigger nexus in the states where the affiliates reside.
- In-State Online Advertising: Similar to affiliate marketing, running banner ads on websites hosted in certain states with click-through nexus laws could also establish nexus, even without physical presence or direct sales.
The Importance of Exemption Certificates: Keeping Your Records in Order
Obtaining exemption certificates from resellers in each tax jurisdiction remains crucial for manufacturers, even if they primarily focus on wholesale transactions. These certificates serve as proof that the sales are exempt from sales tax collection. Here’s why proper recordkeeping is essential:
- Timely Acquisition and Filing: States often have deadlines for obtaining and filing exemption certificates. Manufacturers need to ensure they receive these certificates promptly and file them according to state regulations.
- Retention Periods: Each state dictates the duration for which manufacturers must retain exemption certificates. Failing to comply with these retention periods can lead to penalties.
- Invalid Certificates, Big Headaches: If an exemption certificate is deemed invalid, the manufacturer becomes liable for the uncollected sales tax. This can be a significant financial burden, as the responsibility doesn’t fall on the customer after the sale.
The Multi-State Reseller Challenge
Even when working with a single multi-state reseller, manufacturers need separate exemption certificates for each tax jurisdiction the reseller operates in. This can add complexity to the process, but proper recordkeeping is essential for ensuring sales tax compliance.
Staying Ahead of the Curve
The world of sales tax compliance nexus for manufacturers is constantly evolving. Manufacturers should consider consulting with a sales tax professional to stay updated on specific state regulations and thresholds. Additionally, automation tools can help streamline the process of managing exemption certificates and ensuring compliance across various jurisdictions.
How Sales Tax DataLINK Can Help
Sales Tax DataLINK understands the complexities of sales tax compliance for manufacturers in today’s dynamic environment. We offer a suite of services designed to help you navigate the ever-changing sales tax nexus landscape:
- Nexus Determination: Our team of sales tax experts can analyze your business activities and determine your sales tax nexus obligations in each state you operate in.
- Registration and Filing: We can streamline the registration process for states where you have nexus and ensure your sales tax filings are submitted accurately and on time.
