How Manufacturers Can Avoid Sales and Use Tax Problems

The pandemic and global supply chain disruption have placed an unprecedented burden on manufacturers — and the need for automating manual processes is more pronounced than ever. One way manufacturing companies can lower costs with technology is to upgrade controls for sales and use taxes. Let’s take a look.

Five Issues

With so many stressors bearing down on the manufacturing sector, companies need to be cautious about spending — and try to eliminate overpaying, wherever possible. One way to do this is to look at your company’s sales and use tax processes for inefficiencies and errors. For example, do you:

Overpay tax on equipment, raw materials, and other goods and services? Often this problem comes to light when companies conduct a reverse audit. In some cases, an audit may reveal that you have overpaid vendors by thousands (or for large manufacturers, even millions) of dollars due to hidden costs.

Allow vendors’ global tax errors to slip through? Surprisingly, even suppliers that have adapted to the expansion of e-commerce and digital channels now used around the world can lack global tax expertise.

Inaccurately assess use tax on inventory? Manufacturers sometimes buy items without knowing their ultimate use. Once those items are put into inventory, a tax analysis is applied. It is vital to have a tax accrual process identifying these transactions so that tax can be properly calculated, especially in cases involving items with mixed use. Proper calculations minimize audit exposure.

Depend on tax authorities to issue refunds? You cannot count on the authorities to tell you that you have overpaid sales or use tax. Nor are tax authorities obligated to provide you with an immediate refund. You need to determine when a refund is warranted and request it.

Have trouble identifying manufacturing exemptions and tracking exemption certificates? You can reduce the risk of penalties by accurately identifying and tracking tax-exempt purchases and exemption certificates. Yet these can be complex processes because exemptions vary by tax jurisdiction. For instance, some states provide exemptions on research and development (R&D) products or services or manufacturing equipment. It is important to verify information that is supplied by customers so that your company only claims sales tax exemptions it is legitimately entitled to take.

Practical Solutions

Challenges facing manufacturers in the current environment are only exacerbated by changes in laws and regulations. According to Thomson Reuters’ 2021 State of Corporate Tax Departments Report, nearly half of corporate tax departments have not implemented effective technology and do not have the talent to use it. For example, the report found that tax data management and tax workflow management are the most underutilized features. Of course, smaller manufacturers may not have separate tax departments and may struggle even more with these issues.

On the positive side, 45% of corporate tax departments plan to introduce new technology and automation to address gaps in resources. Small-to-midsized manufacturers can also benefit from investing in technology to help manage their sales and use tax compliance.

Before you make tech expenditures, prioritize your goals. Know that the features associated with the greatest impact are tax provision and direct tax compliance. Overall, successful implementation of technology can lead to lower risk of errors, higher data accuracy, faster turnaround, improved reporting, and cost savings. Furthermore, organizing data in a meaningful way increases control and makes it easier for your business to comply with laws and regulations.

What You Can Control

If your company does not have a dedicated tax department or if your staff is unsure about how to improve processes to boost efficiency and cut costs, contact our manufacturing and distributions team. Although many elements of the current manufacturing environment are beyond your control, you can control what you pay (or overpay) in sales and use taxes.

© Copyright 2022 Thomson Reuters. 

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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.