It is a safe bet that state tax authorities will let you know if you have not paid enough sales and use taxes, but what are the odds that you will be notified if you have 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 do not require them to pay taxes on the utilities and chemicals used in these processes either. In some states, custom software, computers, and peripherals are exempt if they are used for research and development projects.
This is just a sampling of sales and use tax exemptions that might be available. Unless you are diligent about claiming exemptions, you may be missing out on some to which you are entitled.
Many businesses have sales and use tax compliance systems to guard against paying too much, but if you have not 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 & broadly
The audit should extend across your business, going back as far as the statute of limitations on state tax reviews. If your state auditors can review all records for the four years preceding the audit, for example, 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 & supplies
- Safety equipment
- Warehouse equipment
- Software licenses
- Maintenance fees
- Protective clothing
- 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 make sure you are receiving the maximum benefit from industrial processing exemptions, you must know where your manufacturing process begins and ends.
Save now & 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 make sure you do not overpay taxes in the future.
Rules and regulations surrounding state sales and use tax refunds are complicated. We can help you understand them and make sure your refund claims are properly prepared before you submit them.