State Tax Impacts on Manufacturing & Distribution

For manufacturers and distributors, state taxes play a big part in their overall tax position. These organizations often operate across multiple jurisdictions, and state tax regulations can heavily influence decisions about facility locations, supply chains, and overall profitability. As a result, many M&D organizations find it challenging to keep up with these changes and how they may affect their businesses. 

Significant state tax considerations for those in the manufacturing and distribution industries include:  

• Nexus  

• Apportionment 

• State conformity with new federal legislation 

• Combined reporting 

Nexus 

Few U.S. Supreme Court decisions have had as wide-ranging impacts as its 2018 Wayfair decision. The overturning of Quill’s physical presence requirement was a sea-change regarding where companies must file returns and the underlying record-keeping and systems requirements needed to support such filings.  

Under Wayfair, states can now impose their sales tax regime on companies based solely on a company’s “economic presence.” Specifically, it was found that merely having $100,000 of sales OR 200 separate transactions with customers in such a state is sufficient to create a nexus, and a “physical presence” is no longer required.  

All states with a general sales tax have enacted some sort of economic nexus provision, and each has its own nuances. Further, many states are enacting new laws, or attempting to expand existing laws, to impose economic nexus for income taxes. As a result, many companies are finding that they have nexus in a much greater number of states than they previously did. 

Many companies initially viewed Wayfair as only impacting internet retailers, believing it had little or no impact on traditional “brick and mortar” businesses. Consequently, many companies failed to analyze how these provisions impact them fully and underestimated the efforts and resources required to comply with this new landscape.  

How to Remain Nexus Compliant  

A general outline for becoming compliant in an economic nexus world is as follows:

1. Determine your nexus footprint and how it may have changed with these new provisions, and/or due to business changes. While states have implemented different thresholds, a general starting point is to look at those where you meet the $100,000/200 transaction thresholds.

2. Determine what new information you may need from your customers and systems:

1. Do you need to implement a new software package to determine the correct rates that must be charged and reflected on invoices?
2. Do you need to collect additional exemption certificates from customers in new states where you didn’t previously have nexus?
3. Are you properly tracking exempt sales vs. taxable sales, and retaining appropriate exemption certificates?
4. Are additional registrations required, such as with the Secretary of State or for income taxes, in addition to those needed for sales taxes?

3. How will you handle additional filings and the potential associated increased audits?

4. How will an increased sales tax nexus footprint impact other taxes, such as income taxes?

5. What impacts does economic nexus have on your other taxes, such as income taxes and gross receipts taxes? 

Apportionment 

How companies attribute their income to the various states in which they do business is one of the most important aspects of state taxation. Companies often overlook issues such as throw-back and throw out, as well as how nexus can impact apportionment and vice-versa. More specifically, changes in how states source revenue can impact whether a company has nexus with a state, in addition to the amount of tax due to a state.  

Staying on top of how states apportion income, and the various nuances of each state, as well as differences among industries can be a daunting task. EisnerAmper can help you stay abreast of current developments and how they impact your business. We can also help you analyze various planning opportunities to manage your overall state tax burden.  

Sales Tax 

Sales taxes have become one of the more complex areas of taxation, with over 12,000 different rates throughout the U.S., and each state having its own nuances and requirements. Even if all your sales qualify as exempt sales for resale, managing your exemption certificates, and keeping up with filings can be time-consuming and confusing. Further, even if all of your sales are exempt, have you kept up to date regarding the taxability of your purchases?  

Many companies overlook the sales tax implications of their purchases, often resulting in either large overpayments, or significant exposure. This is often the result of assuming your vendors “just know” when tax should be charged and paying based on their invoices, or assuming that various sales tax exemptions are blanket exemptions for all purchases (as opposed to realizing how narrowly construed they tend to be).  

Sales taxes tend to be one of the major areas of deficiency identified in mergers and acquisitions. This often delays transactions and/or creates the need for large holdbacks of the purchase price.  

Get Support with Sales Tax  

EisnerAmper’s sales and use tax group takes a holistic approach to your sales tax needs, and can help you assess where you should be filing, what transactions are subject to sales tax, procure refunds of overpayments, remediate exposure, and take on your sales tax filings. Our approach gives you peace of mind that your sales taxes are being handled correctly and frees up time to better run your business.