If your small business involves manufacturing, sales tax can be a challenging part of your tax liabilities. After all, you may not be providing a service, but typically you are also not providing a final product to an end user. So how can you determine what, if any, sales tax you should be paying for your materials and supplies or if you should be collecting it yourself for the goods you are producing? Here are a few areas where we can provide some clarification on these issues.
Selling to Retailers
Manufacturers and distributors often make direct sales to retailers, as well as other distributors. These sales are made to those companies with the idea that the goods are going to be resold to consumers. Hence, they are typically considered exempt from sales tax. The reason is that sales tax is meant to only be paid one time by the end user or customer, who will be paying the full retail price.
However, if you have a reseller who wants to be able to take advantage of that exemption, they have to produce a current and effective certificate that indicates their exemption status. This is typically known as the Exemption Certificate. As the manufacturer, you must maintain a copy of this certificate with the information about that reseller. You must also have copies of the certificate for all the states and localities where your reseller will be receiving products from your company.
As part of your record keeping efforts, you will need to set up a process that has you auditing your resellers’ Exemption Certificates on an annual basis to make sure that you have the most current certificate for your records. Distributors must also ensure that their own tax-exempt status is maintained and the exemption certificate information is provided to all the suppliers and manufacturers that they might be working with.
Keep in mind, you may have a lot of exemption certificates, but this depends on how many distributors and retailers that you provide products to. This would also apply when you have drop-ship to various locations, because you still need to make sure that the exemption is properly documented.
Selling Directly to Consumers
As a manufacturer, it is rare that you will be selling your products directly to the public. Often though, spare parts, updates, replacement wear items and even some repairs are more common sources of a manufacturer’s consumer-direct sales. Direct sales typically incur an obligation to collect and then remit those sales taxes to the specific state or local tax authority.
These sales are usually transacted over the phone or online, so you need to make sure that your interface is created to be able to handle the computing and collection of sales tax. One of the difficulties is that each state has their own tax rate and may not have the same rules for different products. Therefore, it is worth the effort to find sales tax automation software that can be used to manage this part of your sales. This type of software can be easily integrated with your online shopping cart to deliver accurate calculations with every sale.
Understand that you will have to remember if you are selling to the public, then you will need to make sure that you are collecting the sales tax. Some manufacturers believe that they may not have to worry about it due to being a manufacturer. However, that is not always the case. Working with your bookkeeper or accountant, you can determine which transactions that you need to be aware of in terms of your state’s sales tax laws.
Adjusting the sales tax after a purchase has been completed can mean that you are handling calls from customers who do not have a purchase price that matches their credit card charge. Remember, this is not a profit center for your business, but how you handle it can affect how customers view your brand and whether they are a returning customer.
As you can see, manufacturing does not necessarily mean that you are completely exempt from dealing with sales tax. While you might be collecting less sales tax, due to your limited sales to the public or end users, there is still the possibility that you will have to do so. Therefore, it is important to be prepared to collect it and remit the payment to the state. Additionally, if you have only exemptions, you still need to make sure that you are properly documenting that process.
ERNIE BUSTAMANTE