The complexity of state and local sales and use tax is a problem in every state and for many businesses. Each jurisdiction has a different rule on the taxability and exemption of a particular product or service. For instance, downloaded computer software (that isn’t customized) is considered taxable in New York, but not taxable in California. Payroll services are subject to sales tax in Texas as a data processing service, but this service is not considered taxable in Pennsylvania or New York.
It continues to be a growing problem in an ecommerce world for businesses, especially small businesses, to stay compliant with each state’s regulations and to identify overpaying sales tax. In addition to the complexity of sales and use tax, states continue to broaden the taxability of transactions and audit businesses in order to raise more revenue. As such, businesses are likely to err on the side of caution and pay unnecessary sales tax on purchases or charge customers who are exempt. A company should evaluate the complexity and volume of their sales and use tax transactions to determine if there’s a remote possibility that the company is overpaying sales tax.
Reverse Sales Tax Audit
A reverse sales tax audit is a thorough analysis of a business in order to identify the overpayment of sales and use tax. A state and local sales tax consultant will evaluate your company’s business operations, fixed assets, and how you are paying and charging sales and use tax.
Generally, the first step is an evaluation of the purchasing function within your business in order to obtain an understanding of how purchases are being made and approved. Once the consultant has analyzed the business processes and purchasing methods, a sample of paid invoices will be reviewed for sales tax that was charged on exempt items and for the incorrect sales tax rate that may have been applied. Once a quantitative analysis has been completed, the appropriate documentation and information will be delivered to the state or vendors to recover the overpaid sales tax.
It’s also imperative to have an analysis performed on invoices to your customers. In today’s competitive global market, the ultimate decision of a customer could be based on the price of your product or service. Therefore, it’s vital for a business to know who they are selling to and whether the customer is subject to sales tax in their jurisdiction. Generally, a similar approach in reviewing the purchasing functions would be used on the company’s sales functions.
If you’ve had a reverse sales tax audit performed in the past, opportunities may still exist. State tax laws and exemptions are always changing and these changes could be overlooked by your company. In addition, having a reverse sales tax audit performed in conjunction with a major capital project underway can save tax dollars promptly by avoiding the payment of sales tax on purchases of equipment, supplies, etc. that could be exempt.
If your business engages in manufacturing activities or purchases and sells across multiple jurisdictions, you should discuss a reverse sales tax audit with a Freed Maxick professional from the SALT team. Contact Freed Maxick's professionals to discuss your specific situation, or call to speak with an individual directly at 716.847.2651.