What Do Manufacturers Need to Know about the Wayfair Decision?
Nexus suddenly appeared on many manufacturers’ radars when the Supreme Court decided with South Dakota vs Wayfair case to overturn the physical presence nexus standard. As a result of the 5-4 ruling, manufacturers on both the purchasing and the sales side now must focus more time and resources to meet individual state tax compliance requirements.
For a general overview of the decision and anticipated impact on manufacturers, read our blog: Supreme Court Decision: The Dawn of a New Era
Here are four areas where the new “face” of nexus will impact manufacturers and the best ways to react to these changes.
1) Tax return filings
2) Taxability mappings for goods and services sold
3) Exemption certificate management
4) Taxability decisions on goods and services purchased
Manufacturers will now have to register in more states where they conduct business. Why? Because many states have new laws in place requiring out-of-state sellers to comply with economic nexus or reporting requirements. These new laws come in two forms:
1. Reporting Requirements: Some states have laws in place to require out-of-state sellers to report in-state transactions to the state and notify their sellers of their use tax obligations.
2. Economic Nexus: Some states require out-of-state sellers to collect and remit sales tax if they annually deliver more than a set dollar amount of goods or services into the state, and/or engage in a certain number of separate transactions in the state.
Following the Supreme Court's decision, these laws are now enforceable. We expect nearly every state to pass similar legislation.
The Bottom Line: Knowing where sales tax obligations exist requires manufacturers to stay on top of the nexus laws of each state. If sales are made in states with thresholds, the manufacturer must monitor annual sales and transactions. Even if a manufacturer’s sales are exempt from tax, registration may be required.
Tax Return Filings
Once registered with a state, the manufacturer is required to file sales and use tax returns to that state. Multiple state registrations mean filing multiple tax returns.
The Bottom Line: If a manufacturer meets the threshold set by a state to establish nexus, the company must file a sales tax return, even if the company has no taxable sales in that state.
Manufacturers will need to more closely monitor the taxability of goods and services sold as well as the taxability of purchases.
Taxability of Goods and Services Sold: Since manufacturers will be registering in more states, they will need to know which of their products and services sold in these states are taxable and not taxable. Keeping up with state taxability laws and tax rates is extremely time-consuming.
Taxability of Purchases: Look for an increase in the number of vendors who include sales tax on invoices because more vendors will be required to register with states and collect sales tax. Manufacturers must stay on top of sales and use tax exemptions and provide vendors with valid exemption certificates.
The best way to make the right sales and use tax decisions is to train key employees about exemptions available from states and how to apply these exemptions to purchases. Now is a great time to offer state-specific, manufacturing-focused sales and use tax training to these employees. Check out our blog that explains how training can be the key step to sales tax savings: The Training Manufacturers Need in the Post-Wayfair World.
The Bottom Line: Steps should be taken to make sure the right employees understand the sales and use tax laws in their states.
Exemption Certificate Management
As manufacturers have sales tax obligations in more states, get ready for those states to conduct sales tax audits and review your company’s transactions to audit which sales are taxable and exempt. The states will demand valid exemption certificates for all tax exempt sales. Now is the time to get your exemption certificates organized and updated.
The Bottom Line: Manufacturers need to make sure exemption certificates are well managed.
What does all this mean for manufacturers? As more and more states begin to enforce economic nexus requirements, your sales tax obligations and processes will change. It's more important than ever to train your key employees about state sales tax laws and compliance obligations. Keep up-to-date on how the Wayfair decision impacts manufacturers and steps to make compliance easier by visiting Cherry Bekaert’s Sales & Use Tax team website.