Manufacturing Business Insights: “Why sales tax compliance is important”

Posted on 07.27.17

Manufacturing Business Insights: “Why sales tax compliance is important”

In Virginia, manufacturers are entitled to broad exemption from the sales and use tax, however, this exemption does not extend to all purchases.  The exemption is limited to raw materials, equipment, machinery and other items used directly in the manufacturing process.  Purchases of general and administrative items, general purpose tools and maintenance items, and equipment/items for finished goods storage are generally subject to the tax.  Often manufacturers may take an overly broad or narrow approach to the exemption – meaning they under or over report the tax on their purchases.  While the article addresses sales tax compliance in general, manufacturers may find some of the information very helpful.

Excerpt from Terry Barrett’s VSCPA Disclosures magazine article:

Some businesses take sales tax compliance in stride - they collect and remit the taxes due to the appropriate state(s); others not so much.  Much to my dismay, I occasionally hear from businesses that audits by taxing jurisdictions are their means of compliance.  Certainly that is one way to pay the taxes that are due but I would not necessarily call it “compliance“.  After experiencing an audit resulting in an assessment of tax and interest/penalties, some businesses are more willing to focus the efforts and resources on sales and use tax compliance; others, still not so much.  They opt to wait until the next audit.    

Sales tax compliance is important, not only because the taxing jurisdictions require it and will penalize uncompliant taxpayers, but also because compliance affects opportunities that may come along.  Consider a business that has been postured for sale; its owners are finally ready to sell, cash in on all their hard work, and retire without any worries.  A due diligence review reveals they had not collected sales/use tax on taxable sales in 15 states where they had “nexus” -- a connection sufficient to require tax collection and remittance.  This oversight goes back three to four years or longer.  If the business has not registered and filed, legally the statute of limitations is not in effect.  Was this oversight intentional?  Possibly they knew what they should do but did not want to bother with it; or possibly they really did not know about the other states’ requirements.  In either scenario it could be costly. The prospective buyer decides it does not want to deal with the issue and walks away or requires a significant purchase adjustment.  Sales tax is one of the biggest deal-breakers in business sale transactions.   Access full article

Questions on sales tax compliance for your manufacturing business? We can help. Contact your Keiter representative or Email | 804.747.0000

Source: VSCPA Disclosures Magazine

Posted by: Terry Barrett, CPA

Terry Barrett specializes in state and local tax concerns for her clients. She has over 30 years of experience working in the public and private accounting sector. She is a graduate of Virginia Commonwealth University. You can read more of Terry’s state and local tax insights here.