Managing manufacturing sales tax is complex for a number of reasons. You may have thousands of SKUs with taxability rules that differ across states, as well as hundreds, if not thousands, of exemption certificates to track and keep up to date for your customers. Additionally, tracking your own inventory for materials used internally that are taxed differently than if you resold the item can put a lot of additional sales and use tax knowledge strain on your purchasing teams.
As manufacturing companies grow and expand operations, an increase in customers and monthly order volume can really start to challenge managing all those potential exemptions, leading to order delays and incorrect tax treatment on invoices. These delays and errors can lead to an increase in customer complaints. In 2009 an ERP upgrade project provided Kennametal with an opportunity to reevaluate its current tax systems.
How to reduce future audit assessments by ensuring greater accuracy in your tax filings
One of the most common and difficult challenges a manufacturing company’s tax team can face is not having real-time tax determination and exemption certificate data in SAP or ERP system. Some tax teams using on-premises tax automation systems may still need to send a ticket to IT every time an exemption certificate is needed, causing unnecessary delays in processing an order. Also, if the tax team is responsible for setting up individual state certificates for each customer or distributor, they can lose valuable time waiting for IT to update multi-jurisdiction forms for pending orders.
Implementing a sales tax automation solution can enable a tax team to be self-reliant setting up the customer exemption process without IT support, streamlining the order management process and further improving operational efficiency. Tax teams may also develop extract reports to manage missing and expiring exemption certificates more proactively, eliminating costly rework.
Accounts payable tax automation challenges
It’s a common practice for purchasing departments to make decisions on the taxability of parts or other items a manufacturer is purchasing, often leading to errors in filing and increased audit risk. Implementing a sales and use tax automation solution can help build a streamlined process for validating the tax treatment on purchases, ensuring they are getting the proper exemptions and tax treatment applied from suppliers. Setting up a sales tax automation solution to drive the taxability at the point of sale, purchasing can then just map the correct materials groups and determine the correct tax rates, greatly reducing tax research time. With the help of sales and use tax automation, manufacturers can standardize and automate the AP process and put control back within the tax department, greatly reducing interest and penalty liabilities on audits.
Moving to the cloud for improved sales tax audit defense
According to a recent Aberdeen sales and use tax study, manufacturers are seeing greater frequency and scrutiny of audits than ever before. In line with this finding, many manufacturers have indicated getting more requests to have the states come in to do audits than in the past.
For a multi-billion dollar manufacturer, a poor sales and use tax audit assessment can mean the difference between paying tens of thousands or hundreds of thousands of dollars in penalties and interest per audit. Sales and use tax automation enables tax teams to make more accurate decisions and can eliminate unfortunate audit cycle penalties, which for larger manufacturers can be in the hundreds of thousands of dollars.
As manufacturers begin to move their technology stack to the cloud, many in response to this increased audit frequency and scrutiny, moving to a cloud-based sales and use tax solution will enable tax teams to remove the IT backlog issue, improve jurisdictional-level accuracy and remove the need to manage tax rate and rule change updates, which will always be up-to-date with the current version of the software. Additional benefits include a greater ability to scale, reduction in time spent on audits, and improved reporting tools to streamline audit defense.
Improving sales tax returns filing
Many lean tax teams in fast-growing manufacturing companies also may outsource their returns filing to an offshore third-party. However, time zone differences, communication gaps and collaboration issues are just a few of the challenges this can cause. Utilizing a sales tax vendor with sales tax filing services in the United States, which generally has a lot more knowledge of North American tax rates and regulations and can be more responsive, can save a manufacturer quite a bit of money on licensing fees alone. Streamlining the sales tax filing returns process and improving the accuracy of filing can also be a boost to the bottom line.
Learn how Sovos’ sales and use tax solutions help to automate and improve efficiency of financial processes in manufacturing.