Manufacturing Sales and Use Tax Considerations
Retail companies are getting most of the attention these days, and rightfully so, especially with the US Supreme Court review of its 1992 Quill nexus physical presence decision hanging over their heads like the sword of Damocles. However, the sales and use tax issues of companies in other key industries–manufacturers, wholesalers and distributors, information and technology, construction, and healthcare should not be overlooked by practitioners who advise in these target markets. Here is an overview of some of the key sales and use tax issues in manufacturing. Look for other information on other industries in upcoming posts.
The vast majority of manufacturing firms in the United States are quite small. In 2015, there were 251,774 firms in the manufacturing sector, with all but 3,813 firms considered to be small (i.e., having fewer than 500 employees). In fact, three-quarters of these firms have fewer than 20 employees. (Source: U.S. Census Bureau, Statistics of U.S. Businesses) [www.census.gov/econ/wholesale.html]
In most states, sales and use taxes are imposed on the sale of all tangible personal property and certain enumerated services unless specifically exempt from this tax by statute. Full and partial exemptions from sales and use taxes are available to qualified manufacturers, fabricators, and processors.
Keeping in mind that the burden of proving that a purchase qualifies for exemption rests with the purchaser, issues for manufacturer-purchasers around this include:
(1) Understanding all qualifications before claiming any exemption;
(2) Providing the appropriate exemption certificates to suppliers;
(3) Keeping complete and adequate records;
(4) Substantiating in an audit context its qualifications to tax authorities to avoid substantial additional payments of tax, penalties and interest; and
(5) Understanding the relationship between accounts payable for purchases used in the business with any use tax reporting and collecting responsibilities.
Check out the Use Tax for Manufacturers and Distributors white paper to learn more.