Tracking various state sales tax laws, changes and credits can be complex and lead to missed opportunities. While most states offer sales and use tax exemptions for certain purchases by manufacturers, the messaging, processes and specifics will vary from state to state. It is easy for Manufacturers to overlook exemptions to which they’re entitled, resulting in overpayment on a continuous level. This blog will recommend a tool to maximize allowed manufacturing exemptions – the reverse sales and use tax audit.
What is a reverse audit?
Exactly as the name indicates, reverse audits are the opposite of government audits that seek to collect underpayment of tax. The goal of the reverse audit is to identify and recover overpayments of tax, saving the company money now and in the future by highlighting new processes to implement running forward.
Taking a proactive approach in identifying taxable and exempt transactions can identify earned benefits and provide a review of finances. An internal audit done on your own terms is generally more orderly, less stressful and can be used as support to offset any potential issues that may arise in a regular government audit.
Traditionally, equipment and raw materials used in the manufacturing process continue to be exempt from sales and use tax. With continual legislative changes, many states have actually expanded exemptions to include purchases of resources consumed, directly or indirectly, in the manufacturing process. Common expenses include the use of electricity, gas and water in production.
The variables in state tax laws can be extensive and all over the board. Some states will exempt supplies and other materials consumed in the manufacturing process, such as fuel, coolants, solvents, lubricants and adhesives. Others exempt equipment not used directly in manufacturing but essential to the process such as computers, lighting and electric, plumbing and climate control equipment. Another exempt option can include maintenance-related purchases for equipment, repair parts and supplies.
Items for further consideration of exempt status from sales and use taxes include:
- Packaging materials;
- Material handling and storage equipment used in the manufacturing process;
- Safety equipment and uniforms;
- Fire detection and suppression systems;
- Cleaning equipment and supplies used on or near manufacturing equipment; and
- Pollution control equipment.
Be Aware: Sales and use tax exemptions can be fluid and change over time. Compliance can be challenging, making your reverse audit an active process for re-evaluation. It is critical to stay updated and implement changes as soon as they apply in the states in which you do business and purchase equipment and materials.
Related Read: How Rolling Forecasts Can Provide More Clarity
Are you missing out?
Typically, manufacturing exemptions are not automatic; to claim them, you must present the supplier with an exemption certificate. Proactively taking a closer look at sales tax compliance with a reverse audit is a manageable internal process. This is something you can do to help your company take advantage of available exemptions and ensure that money is not left on the table. Contact your ORBA advisor to start the audit process and recoup any sales and use tax overpayments.
For more information, contact Joyce Carlson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group.