Manufacturing companies report the highest audit rate of any industry — 18%, according to an Avalara survey of businesses across sectors. Auditors know that tax compliance in manufacturing is hard. The question is whether you know where your gaps are before one of them finds them for you.
The challenge for manufacturers isn't one compliance problem — it's several, stacked on top of each other. On the procurement side, there's use tax on materials, machinery, and supplies. In production, there are exemptions that vary by state and by how equipment is actually used. On the sales side, you're managing exempt buyer certificates, economic nexus thresholds across multiple states, and taxability rules that don't always follow logic. Add international shipments and you're also navigating VAT, GST, and HS codes for customs classification.
Most manufacturers have reasonable visibility into one or two of these areas. Auditors look at all of them. That asymmetry is exactly why the audit rate is where it is.
Use tax is the most commonly overlooked compliance obligation in manufacturing — and the one most likely to produce a large assessment when an audit surfaces it. The basic scenario: your company purchases materials exempt from sales tax because they're intended for resale. If you consume them internally — for equipment repair, facility maintenance, internal production — use tax typically applies. But the rules vary significantly by state and by the specific use case.
Machinery exemptions are a common area of confusion. Some states require equipment to be used directly in production more than 50% of the time to qualify. Others exempt new machinery but not replacement equipment. The same piece of equipment might be taxable in one state and exempt in another, depending on how it's classified and how it's used. Getting this wrong isn't unusual. Getting caught with it wrong in an audit is expensive — use tax liability is frequently the largest amount owed when manufacturers are assessed.
Manufacturers that sell to resellers or other exempt buyers are responsible for collecting valid exemption certificates from those customers. An expired certificate, a certificate filed in a cabinet no one checks, or a missing certificate entirely becomes a direct financial liability when an auditor asks for documentation.
53% of finance and tax professionals still manage exemption certificates manually or through a combination of manual and automated processes, according to a 2025 Avalara survey conducted by Hanover Research.² That approach might hold at low transaction volumes. It doesn't scale. The exposure grows with every new exempt customer in a new jurisdiction, and missing certificates are among the top documented reasons businesses incur penalties in sales tax audits — regardless of whether the underlying sale was legitimate.
Every manufacturing facility adds property tax obligations. Real property tax applies in all 50 states. Personal property tax — which covers machinery, equipment, and business assets not permanently affixed to land — applies in 43 states. Classification rules and depreciation schedules vary by jurisdiction, which means the same piece of equipment can be assessed differently across two plants in different states.
82% of companies say they face greater exposure to tax compliance risk today than five years ago.³ For manufacturers with multiple facilities and significant equipment investment, property tax is often the area where that risk concentrates — particularly when assessments go unchallenged because no one has time to review them carefully. Overpaying due to inaccurate valuations is a quiet cost that compounds year after year.
Business Central provides the ERP foundation that manufacturing operations need: purchasing, production orders, inventory, financial management, customer transactions. What it wasn't designed to do is stay current with use tax rules across 40+ states, validate and store exemption certificates at scale, manage property tax filings across multiple facilities, or handle VAT and e-invoicing for international shipments.
Avalara's purpose-built manufacturing solution closes those gaps. Integrated natively with Business Central, it handles real-time sales and use tax calculation, automated multi-jurisdiction filing, exemption certificate management with AI-assisted validation, property tax compliance across locations, and global requirements including VAT, e-invoicing mandates, and HS code classification for cross-border shipments. Agentic AI means the system can flag emerging compliance issues, manage exceptions, and adapt to regulatory changes without requiring constant manual intervention. It's available directly through Microsoft Marketplace, applicable toward your Azure commitment.
The manufacturers who are getting ahead of this are building compliance automation into their processes before an audit forces the conversation. The ones who wait tend to find out what they owe all at once.
Western Computer has implemented Business Central for manufacturers across a range of industries over 35+ years and more than 1,250 engagements. When tax complexity is on the table, Avalara is the partner we bring into that conversation. Let's talk about where your compliance footprint stands today.