Few business were spared from the economic shutdowns and reduced cash flow resulting from the COVID-19 pandemic. While the economy slowly returns to pre-COVID activity, businesses are searching for liquidity through both short and long-term cash-flow opportunities. Reverse sales and use tax audits are one popular liquidity strategy that can lead to significant short-term infusions of cash. These reviews can also provide long-term benefits by highlighting process improvements and reducing prospective tax burdens.

A reverse sales and use tax audit involves a historical review of state and local sales and use tax payments with the objective of identifying and recovering overpayments. The review generally includes an analysis of previously filed returns, accounts payable data, and other supporting documentation such as invoices and purchase descriptions. Unlike the past, most reviews can now be completed remotely and relatively efficiently using proprietary technology solutions to obtain documentation and convert paper files into electronic data. These solutions can significantly reduce the impact on company resources, eliminate or significantly reduce the time required on-site at company locations, and reduce the turnaround time to complete the review.

Any business with multistate or capital intensive operations is likely a good candidate for review. Industries that frequently present opportunities include manufacturing, construction, consumer products, health care, life sciences, telecommunications, research and development, financial institutions and agriculture. However, opportunity is not limited by industry as there are many exemptions that are not industry dependent.

Businesses that have never performed a review or that are experiencing any of the following may have sales and use tax recovery opportunities: ongoing or recently completed sales and use tax audits, merger and acquisition activity, recently completed or planned large capital expenditures, and new ERP system implementations. Reductions or turnover in tax staff due to COVID-19 may have resulted in a ‘brain drain’ or loss of institutional knowledge providing another good opportunity to review recent sales and use tax payments. 

Common issues that are identified during a review are tax paid in error on exempt products or services, tax paid to the wrong jurisdiction, tax paid twice, and overlooked credits or incentives. The lack of an established exemption certificate management processes may also create refund opportunities. This is of particular concern in a post-Wayfair environment where more vendors are charging sales tax to their customers without regard to the exempt nature of the sale. A reverse sales and use tax audit identifies these issues, recovers the overpaid taxes, and gives the business actionable information for prospective process improvements and real-time tax savings.

Takeaways

A reverse sales and use tax audit may lead to short-term cash refunds and long-term tax savings as companies are better positioned to identify sales and use tax exemptions and exclusions after the review. Recovering overpayments can improve the bottom-line, but also provide a meaningful basis to develop planning strategies to minimize overall sales and use tax costs prospectively. Establishing effective and efficient sales and use tax compliance processes can deliver benefits annually and compound the initial benefit of the refund review. Taxpayers with significant sales or use tax remittances should discuss how a reverse sales and use tax audit can be a component of a long-term tax-savings strategy.