Sales and Use Tax can be very complicated for many companies. Most companies do not realize that they can overpay sales tax just as much as they underpay sales tax. A Reverse Sales & Use Tax Audits (“RSUTA”) will help companies locate overpaid sales and use tax. We are often asked many questions regarding RSUTA and thought we would share the answers to some of the most commonly asked questions.
What is a RSUTA?
A RSUTA is the process of reviewing previous years of purchase data for a company to find purchases that the vendor charged erroneous sales tax or that the purchaser accrued erroneous use tax. Generally, these erroneous sales or use tax charges are due to a misapplication of the tax laws by the seller or overlooking of an exemption provided by the state.
What is the statute of limitations for filing a refund claim for overpaid taxes?
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 RSUTA.
For a list of the statute of limitations by state, please click here.
What type of information do you need to complete an RSUTA?
To start a RSUTA 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.
What are the general items you look for to get refunds?
Many RSUTA firms conduct a targeted review based on what industry a company operates in, but that is not how you should conduct a RSUTA. You should review all of the company’s purchases, and based on what areas the company has the largest portion of its spend, you should review the tax law to determine if there is an applicable exemption.
The most common areas we find refunds are with the following types of purchases:
Tax Laws around IT purchases (i.e., software) cannot 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.
For example, a company with its IT group in New York is most likely getting its software purchases taxed at the New York rate even though some of its users are located outside of the State. This creates a refund opportunity since the tax sourcing laws in New York state that New York State is only due the sales tax for the users located within New York State.
Construction/Interior Design Vendors
Many states provide exemptions to purchases that constitute capital 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.
For example, many capital improvement vendors charge sales tax on an invoice for installation that permanently affixes equipment to real property or an HVAC invoice for work that adds to the value of a property even though these projects constitute a capital improvement under NYS Pub 862.
For more information on capital improvements, check out our article on The Top 3 Indirect Tax Challenges for Real Estate Companies.
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.
For Example, ABC Press Inc charged sales tax on promotional materials shipped to a client in New York State; the promotional materials were subsequently shipped out of New York State to other locations outside of New York State for final use. Because of New York State’s sourcing law, the final use of the promotional materials was not in New York State and therefore, the tax should not have been charged on the invoice.
How long does a RSUTA take?
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.
Will submitting a refund claim trigger an audit?
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.
Can the refund be used to offset a current audit?
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.
Can we receive a refund directly from the vendor?
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.
Can we request to no longer be taxed by this vendor?
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.
How often should we complete this analysis?
A RSUTA should be completed every two to three years.
If you have any questions regarding a RSUTA please feel free to contact us at firstname.lastname@example.org