The 2018 Supreme Court ruling in South Dakota vs. Wayfair determined that states can require out-of-state sellers to collect and remit sales tax even if the seller does not have a physical presence in the state. As a result, all 45 states with a sales tax, plus Washington DC have adopted an “economic nexus” requirement, which means sellers that meet a defined volume of sales in dollars or transactions are subject to state and local taxes. Even though sales through manufacturers and distributors are often exempt from sales taxes, it’s important to understand what economic nexus means and the compliance implications.

How Economic Nexus Laws Work

Before the South Dakota vs. Wayfair decision, determining if you needed to collect and remit sales tax was based on whether your company had a physical presence in the state. However, with the exponential growth of online sales, states were missing out on significant sales tax revenues. The Supreme Court decision addressed the situation by allowing the states to define economic nexus thresholds for collecting sales taxes. The threshold amounts differ from state to state. While the typical minimums are $100,000 in sales and 200 sales transactions in a year, a few states set the bar higher, and many only look at dollar volume of sales and not the number of sales transactions. Unfortunately, there is a general lack of uniformity among the states so applying a blanket rule can be dangerous.

In short, compliance can be complex for multi-state sellers. Adding to the complexity, marketplace facilitators, such as Amazon, eBay and Etsy, are usually required to collect and remit taxes on sales made via their platforms. Therefore, sellers must track marketplace sales and apply them, when required, to their threshold totals when determining their reporting of potential tax obligations for each state. In addition, when inventory is stored in multiple warehouses for marketplace fulfillment, the seller can be considered to have a physical presence in the states where these warehouses are located (since they have tangible property located in the State), which creates nexus for sales, income, franchise and local personal property taxes.

Tax Nexus Implications for Manufacturers & Distributors

Manufacturers and distributors are often exempt from sales taxes because most of their sales are made to other manufacturers or on a wholesale basis. However, it’s not that simple. Each state’s manufacturing and distributing exemption is different. Many states’ nexus thresholds are based on both exempt and taxable sales. That means that even if a manufacturer’s sales are primarily exempt, in some states they still need to register as a sales tax vendor with the state and diligently collect and maintain resale certificates from their customers to maintain their exempt status. Failure to solicit and maintain resale certificates from customers can be disastrous for manufacturers and distributors, as most state laws provide that absent a resale certificate, a sale is deemed to be taxable, and resale certificates that are not on hand at the time a sale is made or within a reasonable period thereafter may not be considered by auditors.

In addition, manufacturers and distributors may also be affected by economic nexus laws in their home states. For example, if they purchase equipment or materials from out-of-state sellers, the sellers may be required to collect sales tax. When these types of purchases qualify for a manufacturing or resale exemption, the manufacturer must provide an exemption certificate to the seller.

The South Dakota vs. Wayfair decision can also generate income tax filing requirements for some manufacturing and distribution companies. Like sales tax requirements, physical nexus is no longer a prerequisite to nexus for franchise or minimum taxes. Most states apply a “doing business in the state” standard for tax nexus, with some states employing a factor nexus, such as $500,000 in sales, $50,000 in property or $50,000 in payroll in the state. Federal protections may still insulate businesses selling tangible goods from income taxes in states where they have nexus. For example, Federal Public Law 86-272 protects sellers from income tax in states outside of the company’s home state if the only activity in the state is the solicitation for the sale of goods and all order approval and fulfillment originates outside of the state.

3 Steps to Tax Nexus Compliance

Understanding the tax nexus implications for your business and keeping up with individual state requirements can feel overwhelming. Take these four foundational steps to ensure compliance:

• Do your due diligence on the tax laws in each state your company operates in, including state exemption qualifications for wholesale or non-retail sales for manufacturers and distributors.
• Establish processes to provide and track resale certificates to maintain distributor or manufacturer-exempt status. In some jurisdictions, certificates are only valid for a few years so soliciting new certificates from customers every few years is good practice.
• Apply state nexus rules for collecting and calculating sales tax when required.

The manufacturing and distribution experts at CBIZ can help you navigate your company’s tax compliance requirements and provide guidance to help you optimize your tax planning. Connect with a member of our team and gain access to more resources here.