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Manufacturers & Sales Tax - What You Need to Know

Compliance with sales tax is a relatively simple process. When making a sale, the seller must collect and remit sales tax at the rate applicable to the customer’s location. However, sales made to a customer who is not the end user of the product are generally exempt from the tax. Sales of property made to distributors, wholesalers, and retailers that are to be resold by the customer fall under this exemption.

Protect Yourself – Collect Exemption Certificates
A manufacturer’s sales are often not to the end user of the product and thus exempt from sales tax. The manufacturer should request an exemption certificate from its customer to support the assertion that the sales are made for resale. This exemption certificate should be kept on file and provided to the sales tax jurisdiction upon request.

If a taxpayer is subjected to a sales tax audit, the auditor may request exemption certificates for a sample of non-taxed invoices. In the event that the taxpayer cannot provide the certificates, the sales will be deemed taxable. Obtaining an exemption certificate after the taxpayer comes under audit may not be possible as the customer may have relocated, gone out of business, or may no longer be doing business with you, and as a result become unresponsive. Thus, requesting an exemption certificate should become a mandatory step in the process of accepting a new customer, even if you do not have a filing obligation in the state.

Damage Control – Voluntary Disclosure Agreement
If a jurisdiction discovers noncompliance, the resulting liability can be enormous. The jurisdiction will assess tax owed as well as potentially significant penalties and interest. In addition, if no previous sales tax filings were made in the jurisdiction, a statute of limitation will not apply and the jurisdiction may asses tax, penalty, and interest dating back indefinitely.

In the event of noncompliance, many states have instituted voluntary disclosure programs (VDA). These programs may allow taxpayers to limit their exposure from noncompliance, provided that they have not yet been contacted by the state. The most beneficial feature of a VDA is a limitation on the number of prior periods for which tax will be owed. States generally only require a participant to pay tax liabilities dating back three to four years, abating any tax incurred before this time. An abatement of penalties and a reduction in interest are also standard features of most VDAs.

For more information please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.