Did You Miss This at the FMA Annual Meeting? Here’s What You Need to Know.
At this year’s FMA Annual Meeting, I spoke with dozens of manufacturing and fabrication professionals about a critical but often overlooked financial risk, state and local taxes (SALT). Many were shocked to learn that they could owe taxes in states where they have no physical presence.
As a manufacturer or fabricator, your tax obligations may be more complex than you realize. Expanding operations across state lines, whether through sales, remote employees, or inventory storage, can trigger unexpected tax liabilities. Many assume they only owe taxes in their home state, but economic nexus laws have changed the game.
State tax laws are constantly evolving, and misunderstanding them can lead to penalties, audits, and major financial setbacks. Unfortunately, many businesses don’t realize they’re out of compliance until it’s too late.
I’m Meaghan Figg, CPA, and I specialize in state and local tax compliance for manufacturers. At DHJJ, we’ve helped countless businesses navigate complex tax regulations, identify risks, and minimize liabilities. If you attended my session at the FMA Annual Meeting, you heard me break down these risks, but if you missed it, this article will cover everything you need to know to protect your business and stay compliant.
Let’s dive in.
How State and Local Taxes (SALT) Impact Manufacturers
State and local taxes vary widely from state to state, making compliance especially challenging for manufacturers operating across multiple jurisdictions. Unlike federal taxes, SALT obligations are dictated at the state, county, and even city level, creating a complex web of tax rules.
Income Tax
Most states impose income tax on business profits, but each state has different criteria for taxation. Some states require manufacturers to file returns even if they don’t have a physical presence in that state, depending on how much revenue they generate there.
Sales and Use Tax
Manufacturers often deal with sales and use tax on raw materials, equipment, and finished products. Many states offer exemptions on machinery and materials used in production, but these exemptions require proper documentation. Failing to maintain accurate exemption records can result in penalties during audits.
Franchise Tax
Unlike income tax, franchise taxes are imposed on businesses based on revenue, net worth, or a combination of both. Some states charge franchise taxes simply for the privilege of doing business within their borders, even if your company isn’t generating a profit.
Local Business Taxes
In addition to state-level taxes, some cities impose their own business taxes. Major metropolitan areas like Chicago and Pittsburgh have additional tax requirements for manufacturers, which can further complicate compliance. Keeping up with these changing regulations is crucial to avoid unexpected tax liabilities.
With tax laws evolving constantly, manufacturers must be proactive in understanding where and when they owe taxes. Missteps can lead to significant financial setbacks, but with proper planning and compliance strategies, you can minimize your risk.
Nexus: The Silent Tax Trap That Could Cost Your Business
A critical concept that manufacturers need to understand is nexus. Nexus is the legal term that determines whether your business has a sufficient connection to a state that requires you to pay taxes there. Historically, physical presence was the main factor in establishing nexus, meaning that a business would only owe state taxes if they had an office, warehouse, or employees in that state.
However, this has changed dramatically with the introduction of economic nexus laws. Today, many states enforce tax obligations based purely on sales volume, meaning that even if you have no physical location in a state, you could still be required to collect and remit sales tax there.
Common Nexus Triggers for Manufacturers
Many manufacturers unknowingly create tax obligations in new states by:
- Owning or leasing equipment or facilities in a state
- Hiring independent sales reps who sell in different states
- Storing inventory in third-party warehouses (even without owning the space)
- Sending employees to customer locations for installation or maintenance
- Attending trade shows and conducting sales activities there
- Selling to out-of-state customers, even without a physical presence
Given how easily manufacturers can trigger tax obligations in new states, it’s essential to stay proactive and regularly review where your business might be at risk.
Economic Nexus: Does Your Business Owe Taxes in These States?
Economic nexus has reshaped the tax landscape for manufacturers, making it more difficult to determine where and when tax obligations apply. Most states now impose sales tax obligations based on total revenue generated within their borders, regardless of physical presence.
For example, in California, a manufacturer that generates $500,000 or more in sales within the state is required to register, collect, and remit sales tax.
In Texas, the threshold for franchise tax obligations is also $500,000 in sales.
Meanwhile, New York has a significantly higher threshold of $1.28 million in sales before economic nexus is triggered.
However, the majority of states have adopted a standard economic nexus threshold of $100,000 in sales or 200 transactions, meaning that many manufacturers are now required to register for tax collection in multiple states, even if they never set foot there.
This shift has created a major compliance challenge, particularly for businesses that sell fabricated components or equipment across the country. Without careful tracking, it’s easy to unknowingly exceed a state’s economic nexus threshold, exposing your business to back taxes and penalties.
Why Sales & Use Tax Compliance Is Critical for Manufacturers
Sales and use tax compliance is one of the most overlooked risks for manufacturers. While many states offer tax exemptions for raw materials and manufacturing equipment, these exemptions must be documented properly.
For example, in Illinois, manufacturers can purchase machinery and equipment tax-free as long as those items are used directly in the production process. However, office supplies, general tools, and certain software purchases do not qualify for exemptions. Many states require businesses to periodically renew their resale and exemption certificates, and failing to do so could result in losing the exemption.
Manufacturers must also be mindful of destination-based taxation rules, which determine where sales tax is owed. Some states require sales tax to be collected based on where the product is delivered, not where it was sold. This means that if your company sells custom metal parts to a customer in Texas, you may be required to collect and remit Texas sales tax, even if your business is located elsewhere.
A common mistake manufacturers make is failing to pay use tax on purchases from out-of-state vendors. If you buy a CNC machine from a vendor that doesn’t charge sales tax, you may still be required to pay use tax in your home state. Many businesses overlook this obligation, only to face penalties during an audit.
How the Wayfair Ruling Changed the Game for Manufacturers
In 2018, the South Dakota v. Wayfair ruling dramatically reshaped how states enforce sales tax compliance. Prior to this decision, businesses were generally required to collect and remit sales tax only if they had a physical presence in a state, such as an office, warehouse, or employees. However, the Wayfair ruling introduced the concept of economic nexus, meaning that states can now require businesses to register for sales tax based purely on revenue or transaction thresholds, even without a physical footprint.
Who Is Affected?
The ruling has had a major impact on manufacturers and fabricators, particularly those that:
- Sell Direct-to-Consumer (DTC) Online – Manufacturers that ship products directly to customers across multiple states may now have sales tax obligations, even if they don’t have operations in those states.
- Ship Custom Parts Across State Lines – Fabricators selling specialized or custom-made components to customers in different states must carefully track their sales volume and transactions to determine if they owe taxes.
- Operate Through Distributors or OEM Partnerships – Even if a manufacturer relies on third-party distributors or OEM relationships, economic nexus laws may still require the manufacturer to collect and remit sales tax based on where sales occur.
- Have Remote Sales Teams – Many manufacturers employ sales representatives or field service teams that close deals in multiple states. Depending on the state, this sales activity alone can establish tax obligations.
If your business sells across state lines, you may need to register for sales tax in more states than you realize. Many manufacturers only discover their obligations after being contacted by a state tax authority, at which point they may face back taxes, interest, and penalties.
With sales tax laws continuing to evolve, manufacturers must actively track where they do business and ensure compliance with state regulations. Conducting a nexus study is a proactive way to determine where tax obligations exist and avoid costly surprises.
How to Protect Your Manufacturing Business from Costly Tax Audits
The best way to avoid costly mistakes is to conduct a nexus study. A nexus study reviews your sales, employee locations, inventory storage, and business activities to determine where you might have state tax obligations.
For businesses that discover they have past-due liabilities, voluntary disclosure agreements (VDAs) can help minimize penalties and interest. Many states offer VDAs that allow businesses to come forward proactively and settle past taxes without facing full penalties.
By taking these steps now, you can prevent tax surprises and keep your business compliant as it grows.
Is Your Manufacturing Business at Risk? Here’s What to Do Next
State and local tax compliance is no longer a concern only for large corporations, it’s a critical issue for manufacturers of all sizes. As your business expands, your exposure to multi-state tax obligations grows, and failing to stay ahead of these changes can lead to unexpected tax liabilities, penalties, and audits.
Ask yourself:
- Are we selling or shipping products across multiple states?
- Do we have remote sales reps, service teams, or third-party warehouses?
- Are we correctly tracking and documenting tax exemptions?
- Could these tax liabilities impact our valuation if we plan to sell the business?
If you answered yes to any of these questions, your business may be at risk, and it’s time to take action. Ignoring these issues won’t make them go away, in fact, the longer you wait, the greater the financial consequences.
The good news? You don’t have to navigate this alone. At DHJJ, we specialize in helping manufacturers and fabricators identify where they owe taxes, how to reduce liabilities, and how to ensure long-term compliance. Our team has worked with businesses just like yours to stay ahead of changing regulations, minimize tax burdens, and avoid costly penalties.
Don’t wait until an audit exposes tax liabilities you didn’t even know existed. The best way to protect your business is to be proactive.
Your business deserves to grow without the fear of tax surprises, let’s make sure you’re set up for success.
