Reverse sales tax refund studies, sales tax exemption certificate management, and P.L. 86-272 income tax protections can each unlock savings.
For manufacturers, state and local taxes can impact margins long before an audit notice arrives from a state tax authority. Reverse sales tax refund studies, prudent sales tax exemption certificate management, and Public Law 86-272 income tax protections can each unlock savings — or prevent unnecessary exposure — when addressed strategically rather than reactively.
Sales tax refund studies unlock savings
Many states allows manufacturers sales tax exemptions for purchasing production equipment and related repair parts. Big ticket items like machinery and equipment are usually reviewed by management in detail. However, there could be other savings hiding in plain sight.
Certain purchases from routine vendors such as tooling can be exempt from sales tax if the right conditions exist. Overpayment of sales and use taxes on these high volume, low dollar purchases, can quickly add up and create sizeable tax refund opportunities. Consider routine purchases such as:
- Tooling and dies replaced frequently
- High wear and tear equipment components such as conveyor systems, bearings, belts, and pulleys
- Qualifying safety devices and equipment with expiration dates
- Software used directly in production paid for on a monthly basis
- Utilities related to the manufacturing area
- Packaging supplies
A sales tax refund study can identify and capture tax overpayments as well act as a training ground for your accounts payable department to identify and capture the appropriate sales and use taxes on purchases going forward. This process uncovers immediate refund opportunities and helps establish better purchasing controls to reduce future overpayments.
Importance of proper sales tax exemption certificate collection
Manufacturers are making sales to resellers, wholesalers, and distributors on a monthly basis. In most cases, these sales for resale aren’t subject to sales tax so long as there is evidence in the form of an exemption certificate.
What’s required for sales tax exemption certificate collection?
Companies are required to timely collect sales tax exemption certificates from its customers in good faith. Absent that certificate, a state can hold tangible goods sale to be taxable even if the sale is obviously made to a reseller.
In addition, the duty of management doesn’t stop at the receipt of a certificate. Management has the responsibility to assess each certificate to determine if it’s in properly completed, signed, and dated. Lastly, these certificates are generally not evergreen and need to be refreshed. In some cases, states like Florida require businesses to refresh those certificates on an annual basis.
Sales tax exemption certificate complications during business transitions
When it comes to planning for a business transition, a common issue that could impact sales price is when a company failed to collect the appropriate resale certificates from it customer base. This leaves buyers with audit risk, and potential tax exposure, expecially where certain key customers have gone out of business or were aquired. In those circumstances, the original customer can’t provide a certificate. Even if the customer is still operating, collecting those certificates during due diligence may not be feasible given the time constraints and leads to hold backs from the purchase price.
Be proactive and don’t leave money on the table. These risks are not limited to missing certificates but extend to poorly maintained or outdated records. Establishing clear procedures for periodic review and certificate renewals helps the company demonstrate good faith efforts in an audit or transaction.
A sell-side diligence from a CLA state and local tax professional can help identify these issues as well as establish company procedures.
P.L. 86-272 protection is eroding
Besides complying with multi-state sales tax laws, manufacturers also need to comply with multi-state income tax laws. In many cases, a manufacturer’s only connection to a state is the shipment of products to customers. Since 1959, P.L. 86-272 protection has been afforded by the federal government to protect interstate commerce, and limit the ability of a state to impose an income tax on a company with certain protected activities.
As technology evolves, so too does state tax legislation. Where historically, manufacturers have relied upon P.L. 86-272 protection, states have begun to find new and different ways to assess income taxes and raise revenue.
States have gotten more aggressive by imposing income taxes and adopting rules such as online activities impacting a manufacturing company’s protections. COVID-era remote workforces and changes to multi-state operational procedures have also impacted many company’s protections. Consider these activities if you are currently claiming P.L. 86-272 income tax protection:
- Do you have remote or traveling employees or independent manufacturer representatives that have job duties other than “soliciting” orders for your products ?
- Does your website offer post-sale assistance such as chat functions that can be accessed from any state?
- Does the company sell services (e.g., installation services, warranty services, provide technical advice)?
- Does the business sell into states imposing a franchise tax, excise tax, gross receipts tax, or any other tax not based on income?
If any of these exist, determine if the federal protection you are claiming applies. It is important that you proactively monitor legislative changes and emerging state interpretations, especially as remote work arrangements and digital interactions continue to blur traditional physical presence protections.
How CLA can help manufacturers with SALT requirements
CLA’s state and local tax practice is equipped to help manufacturers identify risks and plan for the future. As your business footprint evolves, so does the need to have a SALT professional on your side. If you’d like to learn more about how CLA can help your organization, reach out for a personalized consultation.