Four on the Floor: Common Compliance Challenges in Manufacturing

In today's manufacturing environment, the biggest unmanaged risk isn't on the factory floor; it's buried in your indirect tax processes. While leaders focus on external pressures, the costliest compliance challenges are happening right within your finance and compliance functions.

Global manufacturers are navigating a complex landscape defined by geopolitical unrest, cost pressures, supply chain disruptions, intensifying regulatory scrutiny, labour market challenges and changing customer expectations.

These macroeconomic variables affect supply chain operations, production processes and back-office activities, including those performed by indirect tax groups. While the impacts of external volatility vary by company, these pressures create four common and critical indirect tax compliance challenges that demand attention 

1. Mounting regulatory demands: Manufacturers face a “regulatory onslaught”, according to the National Association of Manufacturers (NAM). NAM research shows that the average manufacturer sees its profitability eroded by as much as $29,100 per employee per year due to “unbalanced, burdensome regulations” while the smallest manufacturing companies face an even steeper cost of $50,100 per employee annually.
2. The relentless pace of change in indirect tax rates and rules: In 2023, the U.S. experienced a record number of changes in sales and use tax rates, reaching a 10-year high. In the EU, manufacturers also must navigate a fractured value added tax (VAT) landscape. While the EU’s VAT in the Digital Age (ViDA) proposal outlines a future for intra-EU transactions, the current reality is that individual Member States are moving ahead with their own domestic e-invoicing and real-time reporting rules on different timelines.
3. A tangled web of new fees in the U.S.: U.S. states and local taxing authorities are embracing new fees: retail delivery service fees, environmental fees and the like. In most organisations, indirect tax groups are tasked with the complex burden of fee compliance. With some states issuing more than 40 different fees; finding details on these collection and remittance requirements is notoriously time-consuming. Additionally, this trend creates significant operational headaches, often requiring costly reconfigurations of existing billing and ERP systems to produce a separate line item on invoices for fees.
4. The explosion of e-commerce channels: Wholesalers, manufacturers and distributors are rapidly implementing and advancing their online sales capabilities, including direct-to-consumer sites and third-party marketplaces, the use of online marketplaces, mobile commerce, electronic data interchanges (EDI) and more.  These e-commerce activities open up a whole new world of compliance obligations due to the increasing number of countries that collect consumption taxes on online B2C sales to their citizens and increasingly assign tax liability to marketplaces facilitating these sales.

Regulatory burdens, rule changes, new fees and e-commerce complexity all point to one conclusion: manual processes are the modern manufacturer's weakest link. Addressing this single point of failure is the most strategic move a company can make to protect its bottom line in an increasingly complex world.

For additional insights on the ways manufacturers are leveraging automation to address tax compliance articles, see this Vertex-BDO white paper: Conquering Manufacturing Tax Compliance Challenges.