When Tractors Talk, Compliance Risks Arise

Manufacturers are grappling with a host of indirect compliance challenges, including mounting regulatory requirements, rapidly changing tax rates and rules, complex new fee structures in the U.S., new e-invoicing and digital reporting rules in Europe and other parts of the world, and more. “In today's manufacturing environment, the biggest unmanaged risk isn't on the factory floor — it's buried in your indirect tax processes,” notes my colleague, Gunjan Tripathi, the EMEA Director of VAT & Tax Technology at Vertex.

Potential Tax Challenges in Manufacturers’ New Offerings: VAT and more

Tax compliance challenges also arise when manufacturers launch new digital offerings (e.g., maintenance services, telematics solutions, or digital product and service bundles) – or when tax groups rely on manual processes and outdated supporting technology.

Manufacturing companies are wisely leveraging advancements in Internet of Things (IoT) sensors, IoT networks, smart devices and telecommunications technologies (e.g., 5G and 5G Advanced) to improve not only their manufacturing processes but also the customer experience, to enhance existing products and services, and to launch new business lines. Traditional manufacturers are also launching direct-to-consumer (DTC) channels. Each of these activities can expose manufacturing companies to new tax compliance requirements, and audit risks.

How Ford Motor Addresses VAT Complexities

For example, Ford Motor Company now sells electricity for charging electronic vehicles (EVs) and integrated services software among a host of new offerings – many of which have tax compliance implications, according to the company’s Head of Tax & Technology Jerome Cacace. In this video, Jerome discusses the ever-changing tax compliance challenges Ford addresses and how the organization leverages the Vertex platform to address the manufacturing giant’s global compliance obligations.

Manufacturers of all sizes and types must navigate similar tax compliance challenges. The creation of a new DTC channel typically creates nexus in new jurisdictions (countries, states and local districts) which may then necessitate sales tax registrations in the U.S, and VAT registrations in the EU, Canada, Mexico and many other VAT jurisdictions around the world, depending on the business’s activity.

The launch of a new digital service often requires manufacturers to address similar nexus exposures while addressing VAT, digital services taxes, e-invoicing mandates and new classification challenges. For example, when tractors and elevators “talk” to manufacturers’ maintenance and monitoring systems to order new parts and schedule service engagements, these transactions may be subject to subject to federal, state, and local telecommunications taxes.

These types of cutting-edge product and service offerings create compliance challenges that require modern tax technology stacks, Gunjan emphasizes: “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.”

If your team is rolling out smart, connected offerings (telematics, subscriptions, or DTC) and wants to reduce audit exposure while modernizing manual processes, we can help. Book a consult to map your nexus, VAT/e-Invoicing, and telecom tax footprint; and get clear next steps tailored to your ERP landscape.

Or, take a look at this Vertex white paper, Conquering Manufacturing Tax Compliance Challenges for practical advice and best practices to follow in order to maintain indirect tax compliance.