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Why U.S. Toll Manufacturers Create Sales Tax Nexus for Foreign Companies

author photo of Sylvia F. Dion

If you’re a foreign based company that uses the services of a U.S. toll manufacturer, this blog post is for you! You see, a foreign company may be subject to the U.S. sales tax laws if it engages a U.S. based toll manufacturer.

What Is Toll Manufacturing?

But before I continue, I realize some of my readers may not know what toll manufacturing is - so here’s a simple explanation. Toll manufacturing, which is also referred to as toll processing, tolling, toll conversion or custom manufacturing, describes an arrangement where a manufacturer – generally one with specialized equipment and process expertise - fully or partially processes raw materials or semi-finished goods for a customer for a fee. In a typical toll manufacturing scenario, the company that engages the toll manufacturer retains ownership of the raw material inventory or semi-finished goods that the manufacturer works on.

A good example of a toll manufacturing scenario that some of my U.S. readers might be familiar with is the Mexican Maquiladora plant. If you’re familiar with the Maquiladora concept, you probably know that in this arrangement, U.S. companies ship raw materials and components to third-party or corporate owned Mexican-based Maquiladora plants, which in turn process the raw materials and components into semi-finished goods and export them back to the United States.

And while many U.S. readers may be more familiar with the idea of U.S. based companies using toll-manufacturers in other countries, such as Mexico or China, the opposite also occurs. Many foreign companies also ship raw materials and components to U.S. based toll manufacturers. As a matter of fact, if you Google “toll manufacturing in the United States” you'll find there are indeed many U.S. based toll manufacturing companies, many that offer their services to foreign companies.

U. S. Toll Manufacturers May Create Sales Tax Nexus for Foreign Companies

But this is a post about foreign companies that utilize the services of a U. S. toll manufacturer and whether a foreign company may be subject to a state’s sales tax rules as a result.

So, the first thing to keep in mind is that the various States within the U.S. are not a “party to” bi-lateral tax treaties. So even if a foreign company is not subject to U.S. Federal income tax, the foreign company could very well be subject to the various U.S. sales tax laws. (If you’d like to read more about this, see my prior blog post, “Tax Treaties and U.S. Sales Tax Nexus: What Foreign Sellers Need to Know”)

Here’s another thing to keep in mind, having inventory in a state or using the services of a third-party that is performing services for, or acting as an agent of, another company could subject that company to a State’s sales tax laws. Notice, I say could. This is because the rules of the various States within the U.S. are not always the same. Still, in a typical toll manufacturing arrangement, the raw materials and components being processed are still legally owned by the company that engages the toll manufacturer. That is, the toll manufacturer normally does not take ownership of the raw materials or components. And owning inventory in a state is an activity that many states will say subjects an out-of-state (or foreign) company to its laws.

Concluding Thoughts

Foreign companies that utilize the services of a U.S. toll manufacturer should know that a foreign company may be subject to the sales tax laws of the state where the manufacturer is located. (And could be subject to other types of state taxes too, such as a state's corporate income or franchise tax.) Foreign companies should also be aware that the more extensive the activities that the toll manufacturer performs the more likely a state will say a foreign company is subject to that State's sales tax laws. (For instance, if the toll manufacturer distributes the processed goods to the foreign company's U.S. customers or educates or trains the U.S. customers, the more likely a state will say that the foreign company has sales tax nexus to its state.) This is indeed a complex topic, so if you have questions or comments, please feel free to post them below.

About the Author: Sylvia Dion is the Founder and Managing Partner of PrietoDion Consulting Partners LLC, a SALT advisory firm which provides SALT services to businesses in the U.S. and throughout Europe, Canada, Latin American and Australia. Since 2011 Sylvia has served as a contributor to the SalesTaxSupport blogs and currently blogs on Internet Sales Tax, U.S. Sales Tax for Foreign Sellers, and Massachusetts Sales Tax. Sylvia has written articles for State Tax Notes, Bloomberg BNA and other premier tax journals. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “U.S. Sales Tax for Foreign Sellers” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.


4 Responses to Why U.S. Toll Manufacturers Create Sales Tax Nexus for Foreign Companies

  • Posted by Nick on August 10, 2014 1:04pm:

    Hi Sylvia.
    Another excellent post!
    You mention that, 'Foreign companies that utilize the services of a U.S. toll manufacturer... could be subject to other types of state taxes too, such as a state’s corporate income or franchise tax.' Do you know of any more information available online that might help one determine whether or not his/her foreign company is subject to income or franchise tax in the state of its toll manufacturer?
    And secondly, if the manufacturer (used by a foreign company) owned all of the raw materials up to the point of completion of the finished goods, then would it still be considered a 'toll manufacturer'? Or is there a different term for that? And how would that difference affect sales tax and income/franchise tax implications, if at all?
    Thanks very much! :)

    • Posted by Sylvia on August 12, 2014 10:59pm:

      Thank you again for reading my post and your kind comments! As I mentioned in my reply to your comment on my "Tax Treaties and Sales Tax Nexus" blogpost, I focus on all areas of state taxation (sales, corporate income, franchise, employment and other business taxes). In general, a bi-lateral tax treaty will not protect a foreign company from the various types of state taxes or state tax compliance requirements that could apply (such as the requirement to collect/remit sales taxes, pay state corporate income or franchise taxes). This is because the states are not a party to (or bound by) a tax treaty that the federal government enters into. And just like sales tax, the rules are not uniform from state to state, so other types of taxes could apply depending what activity is occurring in a particular state. One of the main services I provide to companies is researching and analyzing in which states they have nexus and for which specific state taxes. But to address your questions - first, in terms of finding something that is readily available on-line for other types of taxes, I can't specifically point you to a free online service like (if you've looked around the, site, you've probably noticed that there is a lot of free sales tax information here). Many of the Big accounting firms produce a "Doing Business in the US" guide (which you can find on-line), but those generally only devote a page or 2 to state taxes and just a high-level overview. However, if you contact me directly, I'd be happy to share some of my own information with you.
      On your second question, if the manufacturer owned all the inventory this wouldn't be a true "toll" manufacturing scenario, but more of a contract manufacturing scenario. As I mentioned in the post, a toll manufacturer typically does not own the inventory (the company that engages them owes the inventory). So if contract manufacturing was involved - whether that would create nexus would really depend on several factors. Again, please feel free to contact me directly at +1-978-846-1641 (I'm on GMT -4) or at

      • Posted by Nick on August 13, 2014 4:11pm:

        Hi Sylvia. Thanks again for responding to my questions. I will be in touch. :)

  • Posted by tax on April 30, 2014 10:55pm:

    Its a great pleasure reading your post. Its full of information, professionally written and I feel like the author has extensive knowledge in this subject.

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