In this four-part “Nexus for Manufacturers” series, we are delving into common nexus-creating activities that often trip up manufacturers and leave them vulnerable to large liabilities. Part 1 and Part 2 of this series focused on employee activities beyond the four walls of the plants and Sales Agents. In Part 3, we will examine nexus considerations based on where your company has inventory.
Manufacturers often keep inventory at the manufacturing site or at their distribution centers. Your physical presence is clearly created at these facilities. But, perhaps not so clear is when inventory is held at facilities other than your own.
Some manufacturers, especially those located in rural areas, will store inventory in non-company owned distribution facilities convenient to trucking, rail, or air terminals. This convenience could be creating sales tax obligations for your company.
Do you ever have inventory held on consignment at your customer’s locations? This practice allows companies to quickly respond to a customer’s request for service or repair. When a product is pulled from this inventory, a sale is made and tax must be collected. Business practices that make good logistics sense could be creating sales tax traps for manufacturers.
Another growing practice is housing inventory at fulfillment centers. Amazon is a good example of this practice. Businesses sell products through the Fulfillment By Amazon (FBA) program. Consumers order products online through Amazon’s website and Amazon fulfills sales orders from their multiple warehouses all over the country.
Currently, 17 states are home to Amazon warehouses that ship and store inventory for their FBA sellers. Amazon moves inventory daily between warehouses to maintain the most efficient inventory stock. Businesses using FBA may have inventory stored in any of the FBA warehouse states, regardless of where the products were originally shipped. Consequently, FBA participants may unknowingly have nexus in multiple states where products are stored.
As you can see, nexus-creating activities are complex. Without proper management, inventory business practices that make delivery to your customers faster and more efficient can wreak havoc to your sales tax compliance.
In Part 4 of our Nexus series, we will share steps to avoid common nexus mistakes.
Have you ever received a state’s nexus questionnaire that was the result of out-of-state inventory storage? Share your best advice for avoiding nexus headaches.
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation
- Use Tax Exemptions Case: Non-Traditional Manufacturer in Missouri