SALT
Chris Vignone
April 25, 2024
Your Sales and Use Recovery questions, answered.
Sales Tax Recovery is the process of reviewing previous years’ of spend data for a company to find purchases that the seller charged erroneous sales tax on or the purchaser accrued erroneous use tax on. Generally, these erroneous sales or use tax charges are due to a misapplication of the tax laws or due to overlooking of an exemption provided by the state.
The statute of limitations varies from state to state. Some states, like New York, carry a three-year lookback, while others, like New Jersey, have a four-year lookback period. If a company has an on-going audit, any period that the taxing authority has open under audit is also open for a Reverse Sales & Use Tax Audits (RSUTA).
To start Sales Tax Recovery you need a report that details all the purchases made by the company for the period in review, and you need access to the company’s ERP / invoicing system. If you find refund opportunities, you may need additional information (i.e., vendor contract) to finalize a refund claim.
When performing a Reverse Sales & Use Tax Audit (RSUTA) most firms conduct a targeted review based on what industry a company operates in, but this is not how we perform a RSUTA. We review all the company’s purchases and after determining the areas where the company has its largest spend we review the tax law to determine if there are any applicable exemptions.
The most common areas we find refunds are in the review of purchases of:
Software – Tax laws around IT purchases (i.e. software) do not keep up with the speed at which new products are developed and brought to market. Furthermore, some purchases by their very nature are challenging to tax correctly in all circumstances.
Construction/Interior Design Vendors – Many states provide exemptions on purchases that constitute as “capital improvement.” However, the definition of capital improvement varies from jurisdiction to jurisdiction, and rather than determine how to correctly tax each transaction, many vendors tax all transactions.
Promotional Material Vendors – Typically, states use the sourcing laws to determine how transactions should be taxed, allowing for purchases to be taxed based on the location of their final use. However, most vendors incorrectly tax invoices based on where they ship their goods to, rather than their final destination for use.
The initial process of data analysis, invoice review, preparation, and filing of the refund claim takes four to eight weeks. Once filed, the claim typically takes six to nine months to get reviewed and approved by the state.
In most cases, the refund claim will not trigger a sales tax audit. However, as expected, the refund claim will be reviewed in detail by the taxing authority. The amount of supporting documentation requested will vary from auditor to auditor.
Yes, refunds can be used to offset audit assessments. In addition to reducing the liability imposed, the offset lowers the amount on which penalties and interest are imposed, resulting in a significantly lower assessment. In some cases, the refund amount is larger than the audit liability amount resulting in a net refund for the company.
Yes, you can, but vendors are not required to give a refund directly to the company. Even if the vendor is not going to give the company the refund in some states (i.e. Georgia) you are required to reach out to the vendor before you can reach out to the state to request a refund.
Yes. If the reoccurring purchases from a vendor are deemed to be “exempt” then an exemption certificate can be furnished to the vendor for future transactions.
A Reverse Sales & Use Tax Audit should be completed every two to three years.
