With tax law updates and manufacturing industry changes, new tax planning opportunities and tax trends are very important for manufacturers to be aware of. The following article consists of three sections with information covering the Wayfair Sales Tax Impact, Income Tax Changes, and International Tax Updates. To read more on each of these sections, click the drop down to read more.
Wayfair Sale Tax Impact
This past summer, the U.S. Supreme Court ruled in the landmark case South Dakota vs. Wayfair that the “physical presence test” for determining if a seller is required to administer sales taxes is “incorrect.” States may now legally require sellers to administer sales taxes, even if the seller has no in-state physical presence.
The most immediate and obvious impact of Wayfair for manufacturers will be increased reporting and compliance requirements on sale transactions, especially related to obtaining resale exemption certificates from customers located in states where manufacturers have no in-state presence. In addition to exemption certificates, manufacturers may now need to register and file sales tax returns in certain states where they ship or deliver goods, even if they do not have a physical presence there.
With the “physical presence” nexus standard no longer the law of the land, states are using sales volume and transaction activity— or number of invoices—as measures for nexus. Sellers need to monitor their economic nexus, in addition to their physical presence, for tax nexus purposes. Many states have an economic nexus threshold as low as $100,000.
Perhaps contrary to popular belief, not everything manufacturers purchase is exempt from sales tax. Office supplies, hand tools, disposable products, and even certain machinery or equipment are often subject to sales tax. Manufacturers may find that their suppliers are now starting to charge sales tax in light of Wayfair. Manufacturers should monitor their supply chains so they don’t, in error, pay sales tax on exempt purchases like raw materials. More now than ever, manufacturers should pay close attention to the invoices received from their suppliers to confirm that they are not paying sales taxes in error (as well as to self-assess use tax, as appropriate).
This article originally appeared in BDO USA, LLP’s “Manufacturers Aren’t Immune from Wayfair’s Sales Tax Impact” Newsletter. Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com
Income Tax Changes
In 2018, there were several changes that took place regarding corporate and individual or pass-through entity income taxes. The following is a summary of some of the more impactful changes:
- Decrease on corporate tax rate to 21%.
- Installation of a 20% Qualified Business Income deduction to pass-through entities.
- Repeal of Domestic Production Activities Deduction.
- Research and development credits are still in place and might be more advantageous due to some of the other tax changes. Starting in 2022, there will be a requirement to amortize R&D expenditures rather than expensing up front as is allowed currently.
- Immediate expensing of capital expenditures due to 100% bonus depreciation on both new and used equipment. There are also increased Section 179 expensing limits.
- Accounting methods are eased for taxpayers under $25 million in gross receipts. This may enable taxpayers to consider making changes to a cash basis of accounting or review their inventory methods to enable potential current tax benefits.
Overall, the majority of these changes affecting manufacturers are taxpayer friendly. There are many provisions that are important to evaluate to ensure your manufacturing company is taking full advantage of the benefits. These income tax changes open up potentially significant opportunities available in assessing your tax accounting methods and reviewing your overall tax entity structure.
International Tax Updates
For manufacturers selling goods out of the country or with foreign controlled subsidiaries or branches, there is a whole new tax regime to consider.
In general, corporations will be transitioned into a participation exemption system, which provides a 100% deduction for foreign controlled corporate dividends. This is considered more advantageous than the previous regime as these dividends would not be taxable. However, there are offsetting provisions that could still lead to additional U.S. taxes such as Subpart F income attributable to foreign subsidiary earnings outside of its locality. There is also a new provision called GILTI (Globally Intangible Low-Taxed Income), which taxes certain excess income of foreign subsidiaries over a threshold.
A new tax incentive was created (for C Corporations only) in the form of the Foreign-Derived Intangible Income deduction (FDII). The deduction provides for a roughly 13% effective corporate tax rate for income attributable to certain income over a threshold which is attributable to foreign sales.
Manufacturers with international operations or sales should consider these new tax provisions in their overall operational and tax structures and be ready for the additional reporting and compliance requirements forthcoming.
HBE’s Manufacturing Industry Specialty Team is well versed on these manufacturing tax changes and is available to consult with your company on how to identify planning strategies that best benefit your operations. For additional information, or to discuss your specific situation, please contact our office at (402) 423-4343 and ask to speak with a member of our Manufacturing Industry Specialty Team.