As manufacturing continues to mature through lean initiatives, ERP and other strategies aimed at improving their focus and delivery, new channels and strategies for finding and delivering value are arising. Three such areas have their own taxing implications, worth noting by manufacturers intent on growing the business profitably.
The first of these of course is ecommerce. Today, the share of U.S. consumers purchasing product direct from the manufacturer has risen to 70%. Customers are enamored of the ease in ordering parts, goods and services online. Manufacturers like the improved margins of forgoing middlemen. But while manufacturing has typically been a tax-exempt endeavor, selling to end-user customers changes that.
There are 45 state and 12,000 taxing jurisdictions in the U.S. Depending on their location and your business nexus, you may have a taxable sale situation when you sell to end customers. In fact, over two dozen states now have “click-through nexus” aimed at capturing sales tax from internet sales and online marketing activities. It’s a bureaucratic thicket requiring careful management.
Going global creates the second taxation challenge. It’s easier than ever to deliver parts and materials to distant, overseas locations. As sales tax experts Avalara note in a recent white paper: “In the US, sales tax is charged at the final point of sale on the full retail value of the product. Under the value-added-tax (VAT) system (used across Europe and other overseas territories), tax is charged at each stage of distribution on the value added between each transaction. So while the end user pays US sales tax, multiple parties involved in the supply, manufacturing, distribution, resales and retail sale of goods are responsible for paying a portion of VAT along the supply chain.”
Add together the VAT, the GST (Goods & Services Tax) and any special tariffs, the total cost is called “landed cost” and the taxing requirements can once again be daunting. Errors can lead to costly shipping delays, not to mention penalties and added scrutiny. Here again, diligent management is crucial.
Finally, selling more services – an increasing slice of the American economy to be sure – are becoming more essential as customers view the sale of a product often as just the beginning of a relationship. Eighteen states now tax services. The sourcing rules can be tricky and each taxes services differently. Nexus becomes an issue in crossing state lines, and sometimes third-party service people can create nexus. Again, it’s a lot to keep track of.
That’s why Avalara offers its cloud based tax and compliance software to companies across the U.S. If you find the rules affecting you, and daunting as most do, they’re worth talking to. (Full disclosure: we are an Avalara referring partner and would be happy to put you in touch with them.