Many manufacturers, wholesalers, and distributors believe they have minimal sales tax obligations due to the likelihood of sales tax-exempt transactions. However, there are numerous pitfalls to be aware of.
Businesses don’t always fit into a “box” as being only a manufacturer, or only a distributor. Many times, a manufacturer is also a distributor. And the terms wholesaler and distributor are often used interchangeably. The concept to consider is whether the sales by these types of businesses are exempt or not from sales tax collection.
Let’s look at wholesale transactions first. Sales of tangible personal property (TPP) are presumed taxable but certain exemptions can apply. An exemption could be related to the type of business that is buying the TPP – a non-profit or government entity in certain states for example. But the most common type of exemption is a resale exemption and is applicable to wholesale transactions. In a wholesale transaction, the buyer intends to resell the item to another entity or end-user. In this situation, the buyer wants to make the original purchase exempt from sales tax, and they expect to then charge sales tax when they sell the item. In this situation, the buyer will present a resale exemption certificate, and the wholesaler/distributor is allowed to not charge the sales tax.
Resale exemption certificates
It is critical for the wholesaler to maintain resale exemption certificates for their buyers. Under audit, a state is likely to ask for copies of these resale exemption certificates, and in the absence of a valid certificate, any transaction(s) are likely to be deemed taxable.
The resale exemption certificate typically includes the buyer’s sales tax ID, a date, a signature, and the reason for claiming the exemption. Depending on the state, additional information may also be required. Some certificates are valid for a set number of years; others never expire.
Among different types of resale exemption certificates, a Uniform Sales and Use Tax Certificate can be used for resale exemptions in many states, with some limitations; the Streamlined sales tax form works in states that participate in the Streamlined Sales Tax project; and individual states issue specific resale certificates and sometimes allow client-created certificates as well.
Every state has nuances on how sales tax applies to purchases related to the manufacturing process and the various equipment and materials that are used and consumed. The complexity for manufacturers sits both on the use tax side as well as the sales tax side.
On the use tax side, manufacturers are dealing with the purchase of various items associated with the manufacturing process. “Consumables” are materials purchased and used during manufacturing but don’t attach themselves directly to the tangible property that leaves a manufacturing facility. “Raw materials” can also be exempt, depending on their use and on the state. “Machinery” and “equipment” directly impacting the manufacture of the tangible personal property generally qualify for exemptions – but again, there are variables. (See our webinar on sales tax in the manufacturing industry for more on this.)
On the sales tax side, manufacturers can deal with the same type of issues as wholesalers/distributors as referenced above. Some manufacturers sell to other manufacturers who in turn qualify for some type of manufacturing related exemption as well.
If you need help understanding your sales tax obligations and whether you should be collecting sales tax, get in touch. TaxConnex has experts to help answer these questions and to help you establish an ongoing process to ensure you remain compliant with the frequently changing rules of sales and use tax.