In these turbulent times, success hinges on a company's ability to pivot to new sales channels and lines of business, and work with new vendors as company and customer needs change. Management teams need to accomplish their goals without spending significant financial resources and time on business processes.

Among the areas ripe for automation is tax compliance. It allows companies to cut costs and processing time, protect themselves against fines and penalties resulting from audits, and create a better customer experience.

Like other industries, manufacturers are increasingly subject to state economic nexus laws, which base a sales and use tax obligation on business activity in a state rather than a physical presence. Some states base economic nexus solely on taxable tangible personal property, or taxable goods and services. Unfortunately for manufacturers, many states include exempt sales of products or services (including sales to resellers) in their economic nexus threshold calculation.

Manufacturers that establish economic nexus with a state must register with the tax department, collect sales tax on any taxable sales made in the state, remit use tax as required, validate exempt transactions with an exemption certificate, and file returns on time (even if it’s a $0 tax return because all the sales are tax exempt). On top of all that, manufacturers must monitor sales into all states with a sales tax because they all have economic nexus laws now, too. 

Another hurdle to remaining compliant is exemption certificate management. Knowing which of your customers are exempt and having the right certificate on file — while also ensuring that it’s filled out correctly, is valid in your state, and isn’t expired — can be a full-time job. And if you don’t have the right certificate on file, the business is responsible for sales tax.

If this doesn’t sound complex enough, manufacturers and other tax-exempt sellers face significant audit risks, in part because exemption certificates and consumer-use tax are among the most prevalent issues auditors find. In a recent survey by Avalara and NetReflector/Potentiate, manufacturing companies claimed the highest audit rate among industries surveyed. Audits can be a significant headache if documents are unorganized, valid exemption certificates are missing, or numbers aren’t adding up.

Audits can take weeks to complete and can chew up critical time and resources. Tax authorities can also penalize wrongdoers with significant fines and fees. By managing business processes manually, using outdated systems, or counting on outside help to stay tax compliant, businesses are placing themselves at a higher risk of wasting both time and money. 

According to results from the Avalara and NetReflector/Potentiate survey, manufacturers devote an average of 149 hours (over $14,200 monthly) to sales- and use tax-related tasks. More than half of survey respondents reported outsourcing some of that work at an average cost of $3,600 per month. These monthly expenses add up to manufacturers spending more than $214,000 annually on people resources to manage tax compliance.

Government requirements are increasingly complex and vast, while rates, product taxability rules and tax laws are constantly in flux. Automation can make it easier and more accurate to calculate tax and exemptions in complex scenarios, including drop shipping. From automatically tracking tax laws and guidelines to alerting when a business is approaching nexus thresholds, automating tools for compliance purposes permits more time and resources to be utilized within other areas of the business. 

Manufacturers can also optimize resources to manage other compliance tasks, such as registration calculation, returns filing and exemption certificate management. This can save teams from the time and effort required to collect, validate and track exemption certificates for tax-exempt transactions.

As manufacturers endure persistent supply-chain interruptions, staffing shortages and economic instability, growth strategies that focus on efficiency will remain critical. While managing sales and use tax compliance might not be top of mind, it’s a key area for companies to rely on automation to streamline the process, and unleash more opportunities for employees to focus on other business priorities.

Kael Kelly is general manager, certs and tax research with Avalara.