OEMs and suppliers may have unknown state tax exposure
INSIGHT ARTICLE |
As Congress inches closer to a final tax bill, manufacturers and suppliers in the automotive industry are focusing a significant portion of their tax-planning time on the proposed federal tax changes. Getting lost in the discussion, however, is the ever-changing landscape of state taxation and the potentially significant tax exposure that companies may be risking, regardless of what tax impacts may occur through federal tax reform.
Auto manufacturers and suppliers may be unaware that their business activities with remote vendors and sales to remote customers may be creating nexus in some locations, allowing states to impose various state taxes on the company and its activities. Examples of nexus-creating activities include supplier-owned tooling located at a vendor or customer location, or performing on-site services for out-of-state customers. Without awareness of the nexus they have created, companies are likely not filing tax returns for these states.
The single sales factor
Most states are moving toward apportioning income to the state using a single-sales factor, so even relatively minor activities at a customer location may create a significant risk of tax exposure for auto manufacturers. Consider the automotive supplier that has its sole location in Ohio and one large customer in Michigan. The supplier has no activities in Michigan other than $5,000 worth of its tooling for a few months during the year at its customer’s location. Nevertheless, the supplier could have significant income tax exposure as a result of owning a small amount of tooling in Michigan, because the supplier sells a large percentage of its products to its customer there.
Due to the nature of their business, auto manufacturers and suppliers usually qualify for a sales tax exemption on their sales to customers (such as resale, manufacturing, processing and the like). However, states have enacted new sales and use tax nexus concepts (economic nexus and use tax reporting requirements) that auto manufacturers and suppliers should consider. Under the economic nexus laws, a company is deemed to have nexus in the state if the company’s in-state sales meet a specific threshold, regardless of whether the company has a physical presence in the state. Accordingly, if the company does not properly maintain sales tax exemption certificates and documentation for a particular state because it was unaware it had nexus in that state, the company could face significant sales tax exposure.
In case of exposure
If state tax exposure does exist, auto manufacturers and suppliers should consider the impact on financial reporting and disclosure requirements under ASC 740 and ASC 450. They should also consider options to mitigate the exposure through state voluntary disclosure and tax amnesty programs.
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