It’s a safe bet that state tax authorities will let you know if you haven’t paid enough sales and use taxes, but what are the odds that you’ll be notified if you’ve paid too much? The chances are slim — so slim that many businesses use reverse audits to find overpayments so they can seek refunds.
Claim your Exemptions
In most states, businesses are exempt from sales tax on equipment used in manufacturing or recycling, and many states don’t require them to pay taxes on the utilities and chemicals used in these processes, either. Additionally, in some states, custom software, computers and peripherals are exempt if they’re used for research and development projects.
This is just a sampling of sales and use tax exemptions that might be available but unless you’re diligent about claiming exemptions, you may be missing out on some to which you’re entitled.
Many businesses have sales and use tax compliance systems to guard against paying too much, but if you haven’t reviewed yours recently, it may not be functioning properly. Employee turnover, business expansion or downsizing, and simple mistakes all can take their toll.
Look Back and Broadly
The reverse audit should extend across your business, going back as far as the statute of limitations on state tax reviews will allow for each jurisdiction. For example, if your state auditors can review all records for the four years preceding the audit, your reverse audit should encompass the same timeframe.
What types of payments should be reviewed? You may have made overpayments on components of manufactured products as well as on the equipment you use to make the products. Other areas where overpayments may occur, depending on state laws, include:
- Pollution control equipment and supplies;
- Safety equipment;
- Warehouse equipment;
- Software licenses;
- Leasehold improvements;
- Protective clothing; and
- Service transactions.
When considering whether you may have overpaid taxes in these and other areas, a clear understanding of your operations is key. If, for example, you want to ensure you’re receiving maximum benefit from industrial processing exemptions, you must know where your manufacturing process begins and ends
Save Now and Later
Reverse audits can be time consuming and complicated, but a little pain can bring significant gain. Use your reverse audit not only to reap tax refund rewards now but also to update your compliance systems to help ensure you don’t overpay taxes in the future.
Rules and regulations surrounding state sales and use tax refunds are complicated. We can help you understand them and ensure your refund claims are properly prepared before you submit them. If you have questions, I can be reached at firstname.lastname@example.org.
Terence Avella, J.D., LL.M. a principal in the State and Local Tax Group of Berdon LLP, brings more than 15 years of combined experience in the accounting profession and private sector. Mr. Avella has advised client management teams on a wide array of federal, state, and local tax matters including all phases of planning, compliance, and provision. He has also performed extensive legal research and written draft memoranda of law on various matters.