By Silvia Aguirre, vice president of certificate management at Avalara
When the COVID-19 pandemic swept the globe in early 2020, much of the normal operating procedure for manufacturers was thrown out the window. In-person meetings were cancelled, new restrictions were put in place for in-person work, and supply chain shortages began to mount.
Still, one of the biggest shifts for the industry was the overnight move to digital operations. Now, nearly two years later, many manufacturers find themselves in the midst of a new, pandemic-driven era of business—one that takes place across a mix of online and in-person channels.
As omnichannel manufacturing has become more popular, companies have had to reorganize their strategies for factors ranging from inventory management to payment collection, so they can serve customers wherever they choose to shop. However, one area that has lagged behind during the shift to omnichannel has been tax-compliance. Arguably one of the most complex pieces of a transaction—managing tax obligations on B2B sales—has only become trickier as manufacturers have adopted new channels.
Here are a few reasons why manufacturers must digitize their compliance management:
Online sales happen in real-time, compliance must too
Many B2B sales are tax-exempt, meaning no tax is paid at the time of purchase, but the buyer must provide exemption documentation for the seller to record. Historically, exemption certificates have been paper-based and provided during in-person sales—something that isn’t feasible in the always-on nature of ecommerce.
The simple fact that different exemption certificates have different expiration dates in different states makes overseeing exemption certificates extremely difficult, especially for companies with thousands of certificates on file. Manufacturers that have a multitude of exempt transactions will benefit from a solid exemption certificate-management system.
Moving to a digital system creates better purchase experiences for customers and reduces headaches for manufacturers. Added benefits of this transition include improving cash flow by reducing tax-calculation errors that can result in rebilling and delayed orders, and receiving alerts when documents are expiring and automatically generating renewal-request emails.
Direct-to-consumer sales create new tax obligations
With more channels, manufacturers are finding value in cutting out the middleman and selling directly to consumers. However, selling direct-to-consumer requires sellers to charge the correct amount of tax on every transaction. The challenge extends even further to include the added complexity of nexus. Most states have economic nexus rules—and some states count exempt sales toward their nexus threshold, while others omit them. And once manufacturers determine where to register, each state has its own rules and schedules for returns filing and remittance.
It is critical to monitor nexus thresholds in each state, according to individual state rules. Doing this, manufacturers will know exactly when their business triggers an obligation to collect sales tax or exemption certificates. By automating sales and use-tax calculation, manufacturers can manually update rates for each jurisdiction. And with digitized returns, it's easier for manufacturers to file on time and in every jurisdiction they need to file.
B2B marketplaces are subject to evolving tax rules
With marketplaces becoming a popular channel, manufacturers will inevitably encounter marketplace-specific tax laws that can shift the obligation to collect tax, but contribute to other tax requirements.
Marketplace facilitator laws can complicate compliance in a variety of ways. Inventory that is used to fill marketplace orders can give a third-party seller physical nexus in a state, often unbeknownst to the seller. Selling through marketplaces can make it more difficult to determine whether you’ve met a state’s economic-nexus threshold. It can also alert a state to your presence and make auditors wonder if you’re registered and collecting sales tax as you should.
It is important for marketplaces and sellers to understand which sales count toward each state’s economic nexus threshold—some states count specified digital products or exempt transactions, while others don’t. States generally require marketplace facilitators to count all sales made through their platform, but some allow marketplace sellers to exclude sales made through a registered marketplace.
Just as modern commerce happens in an instant, so should compliance. To remain competitive, manufacturers who sell across in-person and digital channels must continue to meet customer expectations for a consistent buying experience, while addressing new and expanded compliance challenges. Manufacturers that fail to digitize their compliance-management processes stand to face significant fines and penalties from tax authorities and disruptions to their customer experience.