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 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.
Take all of your exemptions
In most states, businesses are exempt from sales tax on equipment used in manufacturing or recycling, and many states don’t require companies to pay taxes on the utilities and chemicals used in these processes. In some states, custom software, computers, and peripherals are exempt if they’re used for research and development projects.
This is just a sample of sales and use tax exemptions that might be available to your company. Unless you’re diligent about understanding and 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
A reverse audit should extend across your business, going back as far as the applicable statute of limitations allows. If your state auditors can review all records for the four years preceding the audit, for example, a 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
- Maintenance fees
- Protective clothing
- Service transactions
When considering whether your company 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
Although a reverse audit can be complicated, a little time and effort may produce a significant tax refund. Employing a reverse audit not only may reap tax refunds now, it also allows you to examine your compliance processes to help ensure you don’t overpay taxes on an ongoing basis.
Rules and regulations surrounding state sales and use tax refunds are complicated. CSH’s State and Local Tax (SALT) services group can help you understand them and ensure your refund claims are properly prepared and presented to the appropriate tax authority.
