As a semiconductor manufacturing company, what do you need to know about nexus and multi-state tax laws? Despite the fact that much of the manufacturing is often done in other countries (often by third party contract manufacturers), many of these businesses engineer and test the devices domestically, which often makes them subject to a wide range of laws from various states across the country.
6 Multi-State Tax Facts Semiconductor Manufacturing Companies Need to Know About
Fact 1: Nexus extends beyond states in which companies manufacture semiconductors. If they send sales representatives or store inventory across state lines, they may establish nexus without realizing it. Businesses need to be aware of what types of activities create a taxable presence from state to state; we can help with that!
Fact 2: In addition to knowing in which states they’ve established nexus, companies need to note if they’re selling directly to consumers or to resellers. If selling to the end consumer in a state where they have nexus, they’ll need to collect and remit sales tax, whereas if they’re predominantly selling to resellers it’s important they acquire valid resale certificates from their customers. Either case could result in having to file monthly or quarterly sales tax returns. Many businesses miss this step and end up facing headaches under audit, which could have been avoided altogether with proper documentation up front.
Fact 3: When manufacturers remove an item from inventory for testing or to gift it to a client, they should be ready to pay use tax on that product (think of it as if they are selling it to themselves and therefore need to pay tax!). Unfortunately, many semiconductor companies miss this and pay the price during an audit. Being proactive saves time and energy later.
Fact 4: Manufacturers should be aware of sales tax exemptions available. For example, many states offer a sales tax exemption for property purchased to be used during manufacturing or research and development activities. States vary as to the qualifications, the amount of the exemption (full or partial) and the documentation required, so it pays to review the laws in multiple states and not just assume that everyone treats these items the same.
Fact 5: Because semiconductor manufacturing companies invest heavily in research and development (R&D), they should be aware of the many states that offer R&D income tax credits. In many cases the states laws are fairly similar to the qualification of the federal R&D tax credit, but also have some state specific nuances.
Fact 6: Many states offer additional tax credits and incentives that semiconductor manufacturers should look into, such as credits for expanding plants, increasing headcounts and other activities that encourage investment and employment growth.
Case Study: Miles Consulting’s Work with Semiconductor Manufacturing Companies
As you can tell from the above facts, semiconductor manufacturers need to be aware of a lot of multi-state tax issues, from the states in which they’ve established nexus to possible taxes to pay and credits to take advantage of. It’s a lot to know, which is why we’re here to help!
We recently worked with a client who manufactured its semiconductors overseas via a contractor manufacturer, but engaged in testing and R&D activities here in California. In 2014, California passed a partial sales tax exemption for companies engaged in a manufacturing or R&D related NAICS code. In this company’s case, we were able to classify a particular cost center into one of the qualifying codes and thus claimed the partial exemption on purchases of computers, servers and specialty equipment used in the testing and R&D process.
Are you aware of all the ways multi-state tax issues may affect your business? We can take a look at your taxable presence and ensure your company is following through on the taxes it’s responsible for, as well as the credits available to it. Give us a call today!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
