Indiana Sales Tax Refunds: Why Stop at Energy?
Last Updated on February 19, 2025
Indiana is not only the most amenable state for sales & use tax refunds, but it affords area manufacturers numerous exemption opportunities. Sure, energy refunds are low-hanging fruit, but why stop there?
With 3 years of fixed assets and expense invoices, a sales and use tax refund review (AKA reverse audit or overpayment review) should be a best practice to drive dollars to your bottom line, increase cash flow, and tighten up processes to safeguard from continually overpaying tax. There are multiple factors that lead to overpayment:
- States changing applicable sales tax exemptions
- A/P or Vendor turnover
- Conservative stance on paying tax when in doubt
- Vendor charging tax with no exemption certificate in place
- New technologies or your production line set-up opens exemptions
As a manufacturer, in most cases, you should not see any sales tax on your utilities. Thus, if a predominant-use study is performed showing that over 50% is used in the production process, your entire energy (electricity, gas and water) bill should be free of sales tax. (If it falls short of that threshold, only the percentage that applies to production would be exempt. For research and development, apportionment is the only option.)
For non-utilities, it’s a little trickier. The purchase of fixed assets and expenses would have to qualify for the exemption by understanding Indiana sales tax code/case law. Fortunately, a proof of purchase is unnecessary in Indiana, but you still must “prove your case” as there is no study to validate non-energy refund claims. The crux of sales taxability falls on the usage of those purchases and “if” they meet the qualifying criteria.
There are multiple areas of opportunity, including:
- Manufacturing Equipment
- Electricity, gas and water used in Manufacturing or R&D
- Production Machinery Repair Parts
- Electrical Components, Screws, Nuts, Bearings, Washers, Filters, Pumps, etc.
- Production Tools and Supplies
- Drills, Taps, Blades, Grinders, Sockets, Files, etc.
- Material Handling Equipment, Repair Parts (if used within an Integrated Production Process)
- Forklifts, Cranes, etc. if used in manufacturing
- Abrasives, Grease, Fuel, Welding Gases, Gas Cylinders, Electricity, Natural Gas, etc.
- Cost of Goods Sold (COGS)
- Material incorporated into the final product
- Safety Clothing or Equipment if deemed mandatory
- Gloves, Coveralls, Ear Plugs, Hard Hats, Glasses, Safety Shoes, etc.
- Packaging Supplies
- Pallets, Boxes, Strapping, Wrap, etc.
- Research and Development
- Property purchased solely for R&D
- Software used in manufacturing or R&D
If your company has never gone through a reverse audit, there is no crystal ball to show what will be found. Would $50,000 in refunds be worth the effort? How about $100,000 or $500,000? Unlike using a CPA firm, sales and use tax is a specialized focus – in fact, sales tax is not even taught on a CPA exam. Even manufacturers that believe “they have it handled” might be leaving material dollars on the table when you factor in the variables over 3 years of purchasing. Below are two different case studies for Indiana manufacturers:
CASE STUDY #1: Small Indiana Manufacturer with 25,000 sq. ft. of production space. Company also performs R&D.
Day 1: 1 Day Onsite to Review Invoices
Day 17: Predominant Use Study Performed
Day 37: Sales Tax Claim filed and Utilities Claim filed
Day 104: Utilities Claim Decision Made: $9,959 Won ($12,190 Filed)
Day 110: Non-Utilities Claim Decision Made: $161,783 Won ($188,589 Filed)
TOTAL WIN AMOUNT: $171,742 (The State must issue a decision within 90 days of the filed claim to avoid paying interest on the refunds.)
REFUND ISSUES:
-
- Sales tax paid on utilities used in manufacturing process
- Laboratory equipment
- Consumables used in manufacturing/R&D
- Computers/Computer equipment used in manufacturing/R&D
- Safety equipment
CASE STUDY #2: Medium Indiana Manufacturer with two 60,000 sq. ft. manufacturing facilities.
Day 1: 5 Days Onsite to Review Invoices for both production sites
Day 83: Predominant Use Study Performed for both sites
Day 86: Sales & Use Tax Claims filed and Utilities Claim filed
Day 182: Utilities Claim Decision Made: $126,135.36 Won ($163,874.12 Filed)
Day 182: Non-Utilities Sales Tax Claim Decision Made: $759,654.32 Won ($823,648.36 Filed)
Day 182: Non-Utilities Use Tax Claim Decision Made: $229,865.03 Won ($234,127.23 Filed)
TOTAL WIN AMOUNT: $1,115,654.71 (The State missed the 90-day window and had to pay interest on the claims.)
REFUND ISSUES:
-
- Sales tax paid on utilities used in manufacturing
- Laboratory equipment
- Consumables used in R&D
- Computers/Computer equipment used in manufacturing/R&D
- Software
- Packaging Supplies
- Safety equipment
Energy refund opportunity is easy to spot, and if you are erroneously paying sales tax on utilities, chances are, you might be overpaying tax elsewhere. Since most tax guidance is geared toward federal income tax, a sales & use tax refund review should be a best practice employed by every company – especially manufacturers. Plus, Indiana is very taxpayer friendly as they only want their fair share. Why not keep those extra dollars in-house?
Questions? Speak to a Tax Recovery Specialist
For over 25 years, TaxMatrix has serviced Indiana manufacturers and pharmaceutical companies for sales & use tax audit defense and tax recovery. Our recovery service, also known as a refund review or reverse audit, is performed on a success or contingency basis with no upfront fees or costs.
We handle every aspect of the review with nominal time needed from the taxpayer. If a taxpayer is paying sales tax on utilities used in production, we will bear the cost of a predominant use study. Our only billable event is “after” you receive a check from the State. We avail our free Tax Help Desk for ad hoc sales and use tax support per state reviewed.
If you would like more information or would like to set up a free consultation, please contact us today!
