Sales Tax Obligations for Wholesalers and Manufactures
Manufacturers, wholesalers, and distributors believe they have nominal sales tax obligations due to the probability of sales tax-exempt transactions. This is not always correct.
Businesses can be manufacturers and distributors, as wholesalers and distributors are often used interchangeably. The theory to consider is whether the sales by these types of businesses are exempt or not from sales tax collection.
Wholesalers transactions are sales of tangible personal property (TPP) that are usually thought to be taxable, but exemptions can apply. An exemption could be the type of business buying the TPP – a non-profit or government entity in certain states, for example. The most typical type of exemption is a resale exemption. If the buyer intends to resell the item to another entity or end-user, the buyer exempts the original purchase from sales tax and then charges sales tax when they sell the item. The buyer presents a resale exemption certificate.
Resale exemption certificates
The wholesaler must keep resale exemption certificates for their buyers. A state is likely to ask for copies of resale exemption certificates during an audit. In the absence of a valid certificate, any transaction(s) are likely to be considered taxable.
The resale exemption certificate includes the buyer’s sales tax ID, a date, a signature, and the reason for the exemption. Depending on the state, additional information may be required. Certificates can be valid for a set number of years; others never expire.
There are different types of resale exemption certificates. Uniform Sales and Use Tax Certificate can be used for resale exemptions in multiple states. The Streamlined sales tax form works in states participating in the Streamlined Sales Tax Project.
Every state decides how sales tax applies to purchases related to the manufacturing process. Manufacturers sit on both sides, the sales tax, and the use side.
Manufacturers deal with the same issues as wholesalers/distributors on the sales tax side. In addition, some manufacturers sell to other manufacturers who, in turn, qualify for some manufacturing-related exemption as well.
Manufacturers purchase items associated with the manufacturing process on the use tax side. Consumables materials purchased and used during manufacturing are not directly associated with the tangible property that leaves a manufacturing facility. Raw materials can be exempt, depending on their use and state. Machinery and equipment directly impacting the manufacture of tangible personal property generally qualify for an exemption.
If you have questions about your sales tax obligations, contact us for expert advice.
About Davis Davis & Harmon LLC – Sales Tax Experts: Headquartered in Dallas, Texas, Davis Davis & Harmon LLC – Sales Tax Experts specializes in sales/use tax refund recovery and audit defense. Our team of consultants is comprised of former Big 4 sales tax consultants and state sales tax auditors. Each of our consultants has 15 to 20 years of experience, providing our clients with access to a highly specialized team of sales/use tax professionals. At Davis Davis & Harmon, LLC, we are committed to maintaining the highest standards in our talent pool. We work hard to meet our clients’ needs by ensuring that you view our firm as an extension of your company and a member of your team.