Domestic Manufacturers’ Growth Could Bring Sales Tax Problems

“Made in America” is back in the spotlight. As companies move operations back to the U.S. due to global supply chain disruptions and shifting trade policies, domestic manufacturing is seeing renewed momentum.

But along with this growth comes a lesser-known complication: increased sales tax risk.

Why Are U.S. Manufacturers on the Rise?

The COVID-19 pandemic exposed the fragility of global supply chains. Combined with rising tariffs and national incentives to reshore, many businesses are bringing manufacturing operations back to the U.S.

A recent survey shows that nearly 90% of business leaders are planning to shift some or all of their manufacturing to domestic sources. This reshoring trend includes:

• Consumer product manufacturers
• B2B suppliers of materials and equipment
• Distributors and logistics providers

As these companies increase sales across state lines, their sales tax exposure also grows.

What Sales Tax Problems Do Manufacturers Face?

1. Economic and Physical Nexus

What is nexus in sales tax?
Nexus is the connection between a business and a tax jurisdiction that triggers the obligation to collect and remit sales tax.

• Economic nexus is often established by exceeding thresholds such as:

  • $100,000 in revenue, or
  • 200 separate transactions in a 12-month period
    
    
• Physical nexus can be created by:
  • Warehousing inventory
  • Leasing equipment
  • Employing sales reps or technicians in a state

Even remote sales into certain states can create obligations, including local jurisdictions in Alaska that enforce their own rules.

2. Taxability of Products and Equipment

Sales tax laws differ widely when it comes to manufacturing. Not all raw materials or equipment are automatically exempt from tax. Key areas of confusion include:

• Mixed-use inventory (e.g., raw materials used for both taxable and exempt purposes)
• Consumables like gases or chemicals
• Machinery and equipment (may or may not qualify for exemption depending on use)
• Leased equipment, which can establish nexus for the lessor in multiple states

3. Sales Tax Exemptions and Definitions

States often define “manufacturing” differently for sales tax purposes. For example:

• Ohio only considers a company a manufacturer if it changes the form or state of materials for resale.
• Some states exempt manufacturing equipment only if it directly touches the production line.
• Others may deny exemptions for items like utilities, tools, or conveyors that are essential but not part of the final product.

These inconsistencies make multi-state compliance especially difficult.

Key Sales Tax Triggers for Manufacturers

Why Compliance Matters More Than Ever

In our annual survey of finance executives, 48% of manufacturers said they were not fully confident in their current sales tax compliance approach.

Their top challenges:

• Keeping up with tax code changes
• Managing multiple state filing deadlines
• Lack of internal tax expertise
• High cost of audits and non-compliance penalties

Moreover, past sales tax liabilities are increasingly deal-breakers in mergers and acquisitions. If you're planning growth, an audit or unpaid tax bill can derail your strategy.

How Can Manufacturers Stay Compliant?

To navigate the growing complexity of state and local sales tax laws, manufacturers should:

1. Evaluate nexus in every state where they sell, lease, or operate.
2. Classify products and equipment accurately for taxability and exemption status.
3. Document and maintain exemption certificates properly.
4. Automate returns and filings where possible, especially for multi-state operations.
5. Work with a sales tax expert who understands manufacturing-specific nuances.

Sales Tax Doesn’t Have to Slow You Down

Domestic growth is a good thing, but it brings complexity. Don’t let sales tax obligations catch your business off guard.

TaxConnex helps manufacturers simplify and offload sales tax compliance; from identifying nexus to managing filings across multiple states.

Contact us to learn how we can keep your sales tax in check while you focus on building America’s next manufacturing success story.

Check out our webinar on sales tax complexities in manufacturing.