Sales Tax Nexus for Manufacturers and Construction Companies
Sales tax laws are complex, and for manufacturers and construction companies, they can be particularly tricky. Many businesses assume that as long as they follow standard tax regulations, they’ll be fine—but industry-specific nuances can lead to massive, unexpected liabilities.
Sales Tax Nexus
One of the most challenging aspects of sales tax compliance is understanding nexus—the legal obligation to collect and remit sales tax in a particular state. For contractors and manufacturers who operate across state lines, the rules can quickly become confusing.
When a Manufacturer Becomes a Contractor
Consider a scenario where a business manufactures custom wooden kitchen cabinets in Ohio and installs them in homes in other states. At first glance, this company is a manufacturer. It produces goods and provides exemption certificates to suppliers, avoiding sales tax on raw materials because it is expected to resell the final product.
However, when that same business also installs the kitchen cabinets on-site, it is no longer just a manufacturer—it becomes a contractor. This shift in classification carries major tax implications. Unlike selling a product, which may be exempt from sales tax at the point of manufacturing, installing a product as a contractor often triggers a tax liability on the materials used.
The key issue here is that many contractor-manufacturers don’t realize they must self-report and pay use tax on materials purchased tax-free if those materials are used in construction rather than being resold as standalone goods. If this tax isn't included in the project bid, the contractor could be left absorbing the entire cost—sometimes amounting to hundreds of thousands of dollars.
Common Sales Tax Pitfalls
Some common sales tax pitfalls in construction and manufacturing include:
Misclassifying Business Activities– A company that both manufactures and installs products must determine when they are acting as a retailer versus when they are acting as a contractor. The tax rules for each are different.
Failure to Self-Report Use Tax– If a contractor uses tax-exempt materials for an installation instead of resale, they must report and pay use tax, or they risk an audit and significant penalties.
Not Factoring Taxes into Bids– If sales or use tax liabilities are overlooked during the bidding process, a contractor may not be able to pass those costs to the customer, leading to substantial financial losses.
Operating Across State Lines– Tax laws vary by state, and businesses with a physical or economic presence in another state may trigger nexus and owe sales tax there—even if they didn’t realize it.
Why You Need an Expert
While it’s tempting to manage sales tax compliance in-house, the risks of misinterpreting the rules can be devastating. Many businesses don’t realize they have tax exposure until it’s too late—often when they face an audit or a hefty tax bill.
The nexus experts at CSH have deep expertise within the construction and manufacturing industries. We can help navigate the intricacies of sales tax nexus, ensuring compliance with state regulations and preventing costly mistakes. Leveraging CSH to identify risks before they become liabilities, will ensure that your taxes are accounted for properly in bids and filings.
For manufacturers and contractors, working with a tax expert isn’t just advisable—it’s essential. The cost of getting it wrong far outweighs the investment in getting it right.
