When you think about sales tax, you usually think about the sales your business makes. But selling is only one side of the sales tax coin. You also need to factor in and review your company purchases when executing a sales tax compliance plan.
Thanks to the South Dakota vs. Wayfair Supreme Court decision, businesses are now more inclined to tax their goods. But that doesn’t mean you should be paying that tax.
That’s where a sales tax refund review can help. Also known as a sales tax recovery project or reverse audit, this process is where you review your transactions to find any areas where you may have overpaid sales tax and could be owed a tax refund from the State.
Sales tax refund reviews are a great way to recover expenses and keep your company compliant – especially when under audit. But you need to make sure you’re reviewing your purchases regularly.
Every state has a statute of limitations (typically 3-4 years) that prevents the department of revenue from going back past that date in seeking unpaid tax. This protects you from liabilities going back many years.
But it’s a double-edged sword. The statute also limits how far back you can request refunds on tax overpayments. Every month your company waits to start looking for refunds, the more you risk losing out on that money.
So, the sooner you get started, and the more regularly you review your purchases, the better. Here are some questions you should ask yourself when you start reviewing your company purchases.
You ought to consider what you’re purchasing and if you should be paying tax on it. Like we said before, a lot of companies will apply sales tax to that transaction. But that doesn’t mean you need to pay that tax.
There are a lot of exemptions out there for business purchases, which vary from state to state. If you paid tax on an exempt business purchase, then you could be due a refund on that purchase.
This also works the other way. Sometimes the vendor your business is purchasing from won’t assess tax, even though tax was due on that purchase. If that comes up in an audit, you could be liable for the owed tax plus penalties.
The threshold for what is a high-dollar purchase can vary in your company. If your company purchases expensive assets and you spread that expense out over months and years of payment, you need to make sure you’re not paying sales tax incorrectly. States have different rules when it comes to large purchases made under a lease or other installment method. Understanding these rules and determining the location of the sale or lease can save or cost you sales tax amounts unnecessarily.
In 2021 we saw a lot of acquisitions, and in 2022, we’ll see more. Sales tax is often overlooked in the due diligence process, but it really shouldn’t be. Oftentimes in the due diligence efforts, the seller or purchaser is aware of sales tax liabilities that may arise from non-compliance. This is typically identified by the purchaser to ensure they are covered for successor liabilities that may occur upon the acquisition. However, it’s important to note that if you are a successor to any liabilities upon the purchase, you are also a successor of any refunds that may be due to the acquired company. Refund reviews should never be overlooked after the acquisition of a new company.
When you’re under audit, the state will review your books to see where sales tax should have been paid. However, they don’t look for areas you overpaid sales tax and are due a refund. Refunds may be exposed during the audit fieldwork, but it is not the purpose of the audit. Therefore refund opportunities may not be identified and scheduled by the auditor.
A sales tax refund review is a great way to offset the potential costs of a sales tax audit. Become your own advocate and look for places where you might have paid sales tax when tax was not due. You could find that the end result of the audit is a refund and any potential liabilities and penalties are absorbed in refunds of overpaid tax.
Working with a third party on a sales tax recovery project is a great way to find these refunds and make sure that you’re paying tax where you should be. Through the sales tax refund review process, an expert can help get all the refund opportunities out in the open. They can also educate your employees to prevent any future problems and make sure they’re armed to find these refunds moving forward.
We know what it looks like: We’re going in and looking for things that you’ve been doing wrong. But think of it this way. You’ve got a lot of other job functions beyond state sales tax. There’s no shame in asking for help here – especially when it adds money to your company’s pocket.
At Peisner, we always say “collaboration builds confidence.” Working with a professional on a sales tax refund review will help give you peace of mind and the confidence knowing that you’re paying state sales tax where you need to be.
Have questions about state sales tax on business purchases? Looking to start your own sales tax refund review? Sign up for a “What’s Next” call. We’ll be happy to help.