Why manufacturing goods in the U.S. might make sense for small businesses

• The pandemic led to a surprising increase in U.S. manufacturing, but it’s unclear whether the Trump administration’s tariff policies will have similar results.
• Potential benefits of manufacturing in the U.S. include increased agility and fewer complications such as customs inspections or shipping delays.
• Even if companies avoid duties or tariffs on finished goods produced in the U.S., they still need to consider the impact of “reshoring” on sales tax compliance.

Many people think American manufacturing dominance is a relic of the mid-1900s, and that the bulk of its decline occurred in the ’70s, ’80s, and ’90s. However, it was really the first two decades of the millennium that saw a sharp decrease in the industry as a portion of U.S. jobs or a percentage of gross domestic product.

Rebuilding a strong manufacturing sector has been a kitchen-table issue for U.S. policymakers for some time. And now, years after COVID-19 created a global shock that laid bare many systemic shortcomings of the global supply chain, manufacturers face another foundational issue that comes with potential opportunities to pivot: the Trump administration’s tariff policies.

Surprisingly, COVID led to a bit of a manufacturing boom in the U.S., at least compared to other countries. At the end of 2022, American manufacturing grew at a higher rate than manufacturing growth for the rest of the world. Can tariffs create similar results?

Whether tariffs will drive a significant manufacturing increase in the U.S. remains to be seen — in large part because of the on-and-off nature of the administration’s implementation of them — but there are some slight parallels to the pandemic that invite comparison.

Early in the pandemic, as China’s zero-COVID policies brought cities and industries in that country to a halt, international businesses established logistical and supplier relationships elsewhere to bypass a dependency on Chinese goods. Similarly, the U.S. tariffs on goods from certain countries have prompted some businesses to at least explore sourcing their inputs from different markets in order to control costs. (This diversification can have other potential benefits as well, including more consistent availability.)

The COVID era also saw an increase in direct-to-consumer retail, which benefitted U.S. manufacturers by making it easier to cut out intermediaries — and sell products more profitably. So instead of moving manufacturing to the U.S., some businesses might see this increased margin as a reason to simply absorb the higher input costs driven by tariffs (or pass the cost along to customers, of course).

One of the main reasons companies switched to manufacturers outside the U.S. in the first place was the bottom line; goods were just plain cheaper to produce in places like China, Taiwan, and Mexico. But during COVID, businesses quickly discovered those savings weren’t worth it if the factories shut down for three months. And now, thanks to tariffs, those savings might not even exist. 

Beyond hard costs, the farther from home your goods are made, the more likely it is that complications can arise. When you have importing and exporting to manage, you add potential bottlenecks in addition to tariffs, including international shipping complications, customs inspections, global politics, and more exposure to severe weather systems.

In light of these complications following the pandemic, the GMs and Intels of the world began to expand manufacturing operations stateside — known as “reshoring” — over the past several years. But small businesses can benefit from manufacturing in the U.S. too.

Bringing production closer can help companies increase agility: Shipments that take months to fulfill internationally can be ordered, altered, and delivered within weeks. This kind of time savings allows small businesses to adjust to changes in consumer demand and operate efficiently with lower volume orders and reduced back stock.

There are many things to think about when reshoring parts or all of the supply chain. Where you open (or partner with) a plant, factory, or warehouse relies on several considerations, including:

• Labor costs
• Regulations
• Shipping and transportation logistics
• Weather complications

If this sounds similar to challenges facing international manufacturing, that’s because you’ll still need to factor in cross-border differences — state borders. However, they’re typically less complicated due to federal standards, common currency, shorter shipping routes, and a likely reduction in translation errors.

While you won’t have to deal with duties or tariffs on finished domestic goods, you might face tariffs on your inputs to make those goods, if those inputs are imported. You’ll also need to consider the sales tax impacts of reshoring. Each state sets its own tax rates and has its own unique rules — if you have employees, manufacturing plants, or warehouses located in a state, you’ll trigger nexus obligations and be required to collect and remit sales tax to local authorities on applicable transactions.

But you can trigger sales tax without a physical location or presence; for instance, if you have enough online sales to reach economic nexus thresholds in other states, you’ll be on the hook for compliance in those jurisdictions as well.

And any tax-exempt sales for distribution or resale will require exemption certificate management. Essentially, for each transaction, you’ll need to either collect sales tax or have an exemption document on file — and invalid, expired, or missing certificates could put your business at risk of an audit (and penalties).

Don’t forget property tax, either: Moving or expanding manufacturing to the U.S. could mean real property taxes (which apply to land, buildings, and permanently attached fixtures) and personal property taxes (levied on movable items such as machinery). 

Fortunately, there’s technology to help wrangle the back-end tax complications of designing, producing, selling, and shipping products. Avalara is here to help manufacturers, retailers, and manufacturer/retailers leverage AI-powered automation to boost efficiency and compliance — while reducing audit risk and operational disruptions.

Avalara can help you manage tax complexity across the compliance life cycle in over 12,000 U.S. sales and use tax jurisdictions. Capabilities include:

• Determining where to file
• Calculating sales and use tax rates
• Collecting and managing exemption certificates
• Preparing, filing, and remitting returns

Even better, Avalara solutions are made to integrate with leading business systems, so it’s easy to incorporate them into your existing workflows. That means you can reduce your reliance on manual work and spreadsheets, and free resources for more strategic initiatives. 

After all, the whole point of reshoring is to reduce headaches and delays, not swap them out for tax compliance woes. Learn more about AI-powered tax compliance and the purpose-built manufacturing solution from Avalara.

Can small businesses save money by manufacturing in the U.S.?

That depends on many different factors. What tariffs apply to the products where they’re currently manufactured? Would manufacturing in the U.S. require the import of materials that are also subject to tariffs? What about costs for labor, equipment, facilities, and so on? There are potential savings, but every situation is different and requires close evaluation.

What are some of the benefits of manufacturing in the U.S.?

Bringing production closer to home can reduce risk and complexity — for instance, not needing to worry about overseas supply chains and international shipping and customs. This can lead to increased efficiency and agility, allowing small businesses to quickly adjust when the market shifts or consumer preferences change.

Are there drawbacks to ‘reshoring’?

Given the back-and-forth nature of the current administration’s implementation of tariffs — as well as court actions regarding them — much of this still feels very fluid. It’s entirely possible that businesses could make decisions and investments under one set of circumstances, only to have those circumstances change significantly in a matter of months.

What about tax implications?

Wherever a business manufactures or sells its products or services, tax is always a consideration — and most of the time, a challenge. AI-powered automation from Avalara can help businesses streamline sales tax compliance, both in the U.S. and abroad.

How does tax automation simplify compliance?

Avalara solves common tax challenges across the supply chain, reducing audit risk, driving efficiency, and increasing savings. A purpose-built solution helps businesses and finance teams offload manual exemption certificate management, reduce audit risk with quicker access to records, track filing deadlines, and keep up with complex, ever-expanding tax rates and rules throughout the U.S.