State and Local Tax (SALT) Considerations for Manufacturers

For manufacturers operating in an increasingly complex and competitive environment, state and local tax (SALT) considerations play a critical—yet often underestimated—role in shaping financial performance and strategic decision-making. While federal tax policy tends to attract the most attention, SALT exposure can materially influence site selection, supply-chain structure, cash flow, and long-term growth.

Understanding and proactively managing SALT obligations is no longer a compliance exercise alone; it is a strategic imperative.

Nexus: Establishing Tax Presence

Nexus determines whether a state or local jurisdiction has the authority to impose tax on a business. For manufacturers with multi-state operations, identifying where nexus exists is foundational to SALT planning.

Physical and Economic NexusHistorically, nexus was largely driven by physical presence—manufacturing facilities, warehouses, offices, or employees within a state. Today, however, many states also apply economic nexus standards, asserting taxing rights based on sales volume or transaction thresholds, even in the absence of physical operations.

Manufacturers may inadvertently create nexus through:

• Shipping products into a state

• Storing inventory at third-party logistics providers

• Using independent contractors or service technicians

• Exceeding state-specific sales thresholds

Because nexus standards vary widely by jurisdiction and continue to evolve, manufacturers must routinely reassess their footprint to avoid unanticipated tax exposure and retroactive assessments.

Apportionment and Income Sourcing

Once nexus is established, apportionment determines how much income is subject to tax in each state. Most states have moved away from traditional multi-factor apportionment toward approaches that emphasize market participation.

Single Sales Factor ApportionmentMany states now rely primarily—or exclusively—on a single sales factor, which calculates taxable income based on the percentage of total sales made into the state. This shift has generally favored manufacturers with significant investments in property and payroll but broad outbound sales.

Destination-Based SourcingFor manufacturers of tangible goods, sales are typically sourced to the state where the product is delivered to the customer. This market-based approach can increase tax exposure in customer-heavy states, even when production occurs elsewhere. Proper classification of sales, drop shipments, and intercompany transactions is essential to accurate apportionment.

Tax Credits and Incentives: Unlocking Value

State and local governments frequently use tax incentives to attract and retain manufacturing activity. When leveraged effectively, these programs can meaningfully reduce overall tax liability and improve project economics.

Common Incentives for ManufacturersManufacturers may qualify for credits or abatements related to:

• Capital investment in facilities and equipment

• Job creation and workforce training

• Research and development activities

• Energy efficiency or sustainability initiatives

These incentives may take the form of income tax credits, sales and use tax exemptions, property tax abatements, or refundable grants.

Strategic Planning and ComplianceIncentives often come with performance requirements, reporting obligations, and clawback provisions. Manufacturers should evaluate not only the headline benefit, but also the long-term compliance burden and operational commitments associated with each program.

Early engagement—before expansion or relocation decisions are finalized—can significantly improve negotiating outcomes.

Sales, Use, and Property Tax Considerations

Beyond income and franchise taxes, manufacturers face SALT exposure across multiple tax types.

Sales and Use TaxManufacturers must carefully evaluate the taxability of:

• Equipment and machinery purchases

• Repair and maintenance services

• Component parts and raw materials

• Interstate and drop-shipment transactions

While many states offer manufacturing exemptions, qualification criteria can be narrow and documentation requirements strict.

Property TaxIndustrial property tax assessments often represent a significant cost. Disputes may arise around asset classification, valuation methodologies, and the treatment of specialized equipment. Proactive review of assessments and exemptions can yield meaningful savings.

Operational Complexity and Compliance

Managing SALT compliance across numerous jurisdictions presents operational challenges, particularly for manufacturers with decentralized operations.

Key risk areas include:

• Inconsistent state rules and filing requirements

• Rapidly changing nexus thresholds

• Increased audit activity by state and local authorities

• Limited internal visibility across tax types

To address these challenges, many manufacturers are investing in tax automation tools, centralized data governance, and specialized advisory support to ensure accuracy and scalability.

Emerging Trends Impacting Manufacturers

Several trends are reshaping the SALT landscape for manufacturers:

• Supply Chain Realignment: Nearshoring, reshoring, and supplier diversification can introduce new nexus and apportionment considerations.

• Workforce Mobility: Remote and hybrid work arrangements continue to complicate payroll and withholding obligations.

• Entity-Level SALT Planning: Pass-through manufacturers are increasingly evaluating state-level tax elections and structures to mitigate overall tax burden.

Staying ahead of these developments requires ongoing monitoring and cross-functional collaboration between tax, finance, and operations teams.

Conclusion

For manufacturers, SALT considerations extend well beyond compliance. Nexus determinations, apportionment methodologies, incentive opportunities, and transactional taxes all influence profitability and strategic flexibility.

By approaching SALT as a proactive planning function—rather than a reactive obligation—manufacturers can better manage risk, capture available benefits, and support sustainable growth in a complex multi-state environment. value.