Paying the correct amount of sales and use tax is a critical issue for many businesses. Companies do not want to create potential liabilities by not collecting tax on sales; but at the same time, these businesses should also be concerned that they are not overpaying or remitting too much sales and use tax on their purchases. If you are already closely examining operating costs and looking for savings, it’s the perfect time to re-examine those sales tax returns and invoices to identify potential refund opportunities.
You might be thinking that, if your business is not in the manufacturing industry, there is minimal opportunity for refunds, since many states’ more lucrative sales and use tax exemptions are geared toward manufacturers. While this may be true, there are many exemptions applicable to all types of businesses, regardless of the industry. Depending on specific tax laws in each state where you do business, the following areas may be worth investigating:
Advertising
Services provided by advertising agencies are typically nontaxable, but you should also examine charges related to printing marketing materials, especially those associated with direct mail services.
Computer software and services
Think about the state(s) where software is being used by your employees and where you are paying sales and use tax on it. If your business is being charged sales tax on 500 software licenses in your home state, because that’s where the invoice was billed to, but you are only using 225 of those licenses at your home office and the rest are used by employees in other states, you may have made too much sales tax on that software. Many states doe not tax computer services either, especially those related to software purchases.
Services
Most states tax only a limited number of services. Look for opportunities related to construction services, installation and repair/maintenance services, personal and professional services, and transportation services that you may be paying or accruing tax on erroneously.
Many states also have industry-specific exemptions available for financial institutions, healthcare providers, retailers, etc. Furthermore, you don’t want to be known as the business that fails to take advantage of state and local enterprise zone exemptions for which you may qualify.
Manufacturing companies that already enjoy an abundance of exemptions in most states related to purchases of machinery, equipment, replacement parts and repair/maintenance services should keep in mind that they may have mistakenly paid sales and use tax on these purchases as well. Also, there are numerous potential exemptions indirectly related to manufacturing including research & development, quality testing, pollution control, packaging, utilities and other fuels used to run production machinery and equipment and/or provide for employee safety.
A business does not have to wait to be audited by state taxing authorities before it can file a refund claim. With most states’ statute of limitations extending for three or four years, you can identify a considerable amount sales and use tax overpayments that can be refunded to the business.
If you have any questions about this or other SALT issues, please email Tom Mazurek at tmazurek@tsacpa.com. For additional State and Local Tax insights and resources, or to subscribe to our quarterly newsletter, visit tsacpa.com.
