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Analysis

5 Considerations for Sales and Use Tax Compliance in Manufacturing

Sovos and the Manufacturers Alliance Foundation recently released “The Changing Landscape for Sales and Use Tax Strategies,” and we wanted to highlight a handful of important considerations for manufacturers in evaluating their current and future approaches to sales and use tax compliance. 

Evaluating your current sales and use tax strategy

Manufacturers may have a sales and use tax strategy currently in place, but the time is right to evaluate whether that strategy is effective in efficiently and accurately maintaining your compliance today and whether it’s scalable to meet your needs tomorrow. If your business is supporting labor- intensive manual processes to keep things together, it may be time to find something new.

Survey respondents identified “number of audits without adjustment” along with “percentage of on-time filings” as their primary key performance indicators around compliance success. In fact, these criteria were favored over avoiding significant audit penalties. While unquestionably important, we suggest that manufacturers should also factor in some strategic indicators, including independence from manual processes and confidence in scalability as your business grows and compliance requirements expand.

Leveraging the right solutions for sales and use tax compliance

The manufacturing industry has clearly spoken. While there will always be some benefit to localization of the sales tax compliance function, the enormous efficiencies associated with centralization are impossible to ignore. Having the tax function organized around a single “center of excellence” where experience, best practices, and efficient processes can be shared is truly the only way to keep up with the pace and rate of tax change in the modern era. This is doubly true knowing that 77% of our surveyed manufacturers have tax teams comprised of 10 or fewer individuals. 

Leveraging automated sales and use tax solutions will ensure efficiency and accuracy, and it will streamline reporting capabilities. Cloud-based solutions (or even a hybrid option) will streamline updates and keep the business moving forward.   

Ensuring alignment between IT and tax

As tax professionals, we may have a bit of a bias here but it is clear that regardless of who leads and makes the final selection, both IT and tax must be involved from the very beginning, and both parties must have influence over the selection. Far too often we have seen IT-centric processes miss (or at least misunderstand) key compliance needs and requirements, and tax-centric processes fail to consider the practicalities of automation. Likewise, both tax and IT must realize that they will need each other for ongoing maintenance and solution expansion initiatives. Leaving one side or the other with the sense that their voice was not heard and acknowledged in the selection process is going to make for a rough partnership going forward. 

Minimizing audit risk

Sales and use tax audits are increasing, and with 78% of survey respondents anticipating more audits in the next 12 to 36 months, manufacturers can't claim surprise when this expectation comes to fruition. But how can you reduce audit risk in a world where the sheer volume of audits will be increasing?

We have seen organizations integrate a thoughtful and robust compliance process and then simply forget about it. They fail to make any adjustments as their organization expands and evolves, moves into new geographies, sells new products, and opens new channels. As the original architects of the solution advance in their careers, the practices and procedures around the solution are forgotten, and established best practices are lost to time. That is until they discover (often upon audit) a gaping hole in their compliance. Organizations would be well served to establish and share solid documentation around their compliance protocols and conduct periodic reviews to ensure they are continuing to do what they need to do to keep their company safe.

Understanding the consequences of non-compliance

There are both tactical and strategic questions at play here, and manufacturers need to make thoughtful business decisions around the level of sales and use tax compliance that is sensible for their particular circumstances. For example, a manufacturer that functions as an intermediary in the supply chain and always sells for “resale” might indeed escape audit scrutiny for many years. But remember that under sales tax rules across the country, a transaction is deemed to be taxable unless proof is offered to the contrary. In that circumstance, a manufacturer may opt to register, collect exemption certificates and report exempt sales. Maybe this manufacturer would not register in every state right away because the task seems daunting. But they could consider registering in states where:

  1. They have a physical presence because it's likely that – at least in some circumstances – they have a consumer’s use self-assessment responsibility, regardless of their sales tax collection obligations.
  2. They have substantial business volumes, tackling the largest volume states first and working their way down the list.

Sales and use tax compliance requirements will continue to grow in frequency and complexity. Manufacturers must review the current state of sales and use tax processes within their company and prioritize the expansion of automated solutions in the places where they will provide the most efficiency. Ensuring your compliance protocols are well documented and periodically reviewed will help stave off the risk of increased audit volume that we know is coming. The industry has to commit to effectively and efficiently meeting the ever-growing compliance obligations.
 

Author

Chuck Maniace, Sovos

Vice President, Regulatory Analysis and Design