If you have not paid all of your Texas sales and use taxes, chances are, the Comptroller’s Office will let you know about it. However, when you pay too much sales and use tax, no one is going to tell you. To identify overpayments and seek reimbursements, companies should consider conducting a “reverse audit,” whereby it audits its own records looking for overpayments of sales and use taxes.
Take Advantage of Tax Exemptions
While many companies have sales and use tax compliance systems in place to prevent overpayment of sales and use tax, such systems need to be frequently reviewed to ensure that they are working properly. Business expansion or downsizing, employee turnover, or even just human error can compromise the safeguards you have in place, resulting in overpaying sales and use tax.
The majority of overpayments come from unclaimed tax exemptions. With a combined sales tax rate in Texas typically exceeding 8%, it can be well worth your time to ensure that you are claiming all of the exemptions that you are entitled to receive. For example, manufacturers are exempt from sales tax imposed on their manufacturing equipment and related replacement parts and utilities. Beginning in 2014, Texas also offers an exemption for certain research and development expenditures.
Timing is Everything
One of the best times for conducting a reverse sales and use tax audit is at the start of a major capital project. Even if you cannot commit to the time and expense of a full companywide audit, you can still audit the transactions specifically associated with this project. Not only will you uncover overpayments during the project, but you will also be reminded of previous projects with similar transactions.
Another excellent time for a reverse audit is when there is a significant change to state tax law. Changes in tax laws are often overlooked but can result in significant missed opportunities. As the 2015 Texas Legislature ramps up, many sales tax exemptions are being considered.
The Anatomy of a Reverse Audit
A reverse audit should look at both your tax compliance systems and your purchasing records. It should encompass your entire business and go back as far as the statute of limitations will allow (four years in Texas).
Sample payments that should be reviewed include:
• Warehouse equipment
• Safety equipment
• Maintenance fees
• Service transactions
• Software licenses
• Protective clothing
When examining whether you have made overpayments in these or other areas, it is important to have a comprehensive understanding of your operations and the applicable tax law. Companies must be able to examine the process as a whole to maximize the benefit from potential sales and use tax exemptions.
Worth the Investment
Reverse audits can be a lengthy and involved process, but the rewards can make it well worth the effort. When utilized to its full potential, a reverse audit will not only allow you to claim refunds of significant amounts of overpaid taxes, but will also enable you to update your compliance systems to minimize overpayments in the future.
The intricacies of sales and use tax law are complicated. Before tackling them on your own, be sure to work with your trusted state and local tax specialists at Lane Gorman Trubitt, PLLC. Jon Wellington, Director of State and Local Taxes, can be reached at (214) 461-1430 or by email at firstname.lastname@example.org.
Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871.7500 or email email@example.com.