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 so slim that many businesses use reverse audits to find over payments 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. In addition, many states don’t require businesses 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 sampling of sales and use tax exemptions that might be available. Unless you’re diligent about claiming exemptions, you may be missing out on savings.
Many businesses have sales and use tax compliance systems to safeguard against paying too much. However, if you haven’t reviewed your processes recently, they may not be functioning properly. Employee turnover, business expansion, downsizing and even simple mistakes can cause issues over time.
Look back and broadly
The audit should extend across your business, going back as far as the statute of limitations on state tax reviews. For instance, if your state auditors can review all records for the four years preceding the audit, your reverse audit should encompass the same time frame.
What types of payments should be reviewed? You may have made over payments on components of manufactured products, as well as on the equipment you use to make the products. Additionally, the other areas where over payments can 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 you may have overpaid taxes in these and other areas, a clear understanding of your operations is key. For example, if 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 to not only reap tax refund rewards now, but to also update your compliance systems to help ensure you don’t overpay taxes in the future.
If you have any questions on ensuring your refund claims are properly prepared before submission, please contact your tax advisor or Bernie Ottenlips, Principal, State and Local Tax Services, at 314.687.2375 or firstname.lastname@example.org.