Let’s face it, were it not for the threat of an audit, many taxpayers would simply insert a column of zeros down the right side of the sales and use tax return, send it in, and not worry about whether the amount of tax was correct or not. For this reason, states audit their taxpayers to protect the state’s interest in the sales and use tax. So, why don’t more companies make more of an effort to protect their own interest in the tax they report to the state?
One tool available to companies to protect that interest is the reverse audit. A reverse audit essentially looks at the tax that the company pays to vendors, or directly to the state through use tax accruals or through audit liabilities, to determine if the amount of the tax is overstated.
A reverse audit can either be done in-house by the company’s tax or accounting staff or, if the tax department is overburdened or lacks the technical expertise, it can be done by an outside consulting firm specializing in this service. The important point is that sales and use tax paid to vendors or the state be reviewed for overpayments.
Fortunately, the California State Board of Equalization has stated recently that refund claims will not be affected by the state’s budget crisis. That is, the state will continue to process refund claims regardless that there is no money in the budget to do so. This is good news for taxpayers experiencing the cash crunch of the century.
Many refund opportunities arise when services are bundled with sales of tangible personal property, such as installation charges, maintenance agreements, computer software, construction contracts, and even technology transfer agreements.
Also, some companies fail to take advantage of available exemptions, or take too narrow a focus when assessing the application of the exemption to their industry. For instance, a telecommunications provider might be missing out on exemptions by simply looking to telecommunications exemptions in their state and not pursuing related manufacturing exemptions.
Other opportunities arise when an out-of-state vendor charges tax to their customer based on the vendor’s home state rules, rather than on the customer’s home state rules. Computer hardware and software installation charges, for instance, are taxable in Texas but not in California. If the Texas vendor is not fully versed in the taxability of installation charges in California, those exempt charges could be taxed on the vendor’s invoice.
Another area that can pave the way for a refund opportunity is when the exemption for an item is based on the use of the item, rather than the nature. For instance, oxygen gas used in an industrial capacity may be taxable, while the same gas used in a medical capacity may be exempt.
With sales and use tax rates in many states approaching 10%, protecting the company’s interest in the sales and use tax paid can make a substantial difference in the company’s bottom line.
