Are You Leaving $100,000+ On The Table? – Overlooked Indiana Sales & Use Tax Savings

Last Updated on August 14, 2023

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My name is Clyde Gentry, the 3rd.


I’m the Vice President of Business Development for Tax Matrix.


I’ve been with the company for roughly 13 years and I reside in Dallas, TX or actually about 20 minutes north in Frisco.


And joining me is Joe Bennis, our tax manager and also former Indiana State Auditor.


Say hello Joe.


Good morning everyone.


Mike Clyde said I’m here former Indiana State Auditor.


I live in Pendleton IN if you’re familiar with the Indianapolis area, I’m about 10 minutes north of Topgolf, right, right.


So just a quick note about tax matrix, we are leading sales and use tax recovery and audit defense firm.


We’re actually celebrating our 24th year in business.


We do work extensively nationwide with a number of companies, but I I think as far as industry clusters are concerned, manufacturing and pharmaceutical have been probably our top two.


I would say Indiana is probably our largest filing state by far.


We actually have affected the tax case law in the past, especially for R&D.


We actually settled a refund claim back in 2015 for over $15 million.


The purpose of this webinar is to educate Indiana manufacturers on cost savings through sales and use tax recovery, otherwise known as a refund review.


In addition, we will be addressing audits and we will also be talking about how to safely navigate through the state process.


Just as a quick overview, we’re going to kind of start from the very, very top.


We’re going to cover in, you know Indiana sales tax 101.


We’ll walk through the actual tax recovery process from A-Z.


We actually have a couple of case studies for both for a small and large manufacturer and then we’ll end up talking about audit defense managed compliance agreements and then we’ll address obviously what tax matrix as a firm can do.


So this is something that I often hear whenever I talk to somebody about sales tax, we got it covered and the the way I can I can best explain it is it’s not about the 95% that you get right, it’s about the 5% you don’t because sales and use tax exemptions are not always as black and white.


I think there’s always a degree of ambiguity that it built into tax case law that leads companies to otherwise overpay or over accrue sales and use tax and it always comes down to how is a product or service being used to actually run your business.


I point to software, software is typically a taxable event in Indiana but if it touches the manufacturing or the R&D process it can be exempt.


Case in point, you know probably about three or four years ago we dealt with a small manufacturer.


We were going through a laundry list of different things and the the relative boots on the ground was on on the call and was saying you know we have that covered, we have that covered, we have that covered.


And then we started getting into software and it turned out that they were using software on on a couple of different fashions in in regards to the manufacturing process and the the you know it was just utter silence.


And so one of the things we pulled out of that is obviously that they were probably overpaying and it turned out they were and that ended up being just five figures alone just for that one, you know, single solitary subject.


So you know sales tax is not something that’s taught on a CPA exam.


It’s one of those things where most companies kind of leave it on auto drive.


It’s it’s a, it’s a back burner issue and and I think most you know folks that are in a tax management role are are really brought in strictly for federal income tax.


And unfortunately they have to adopt A number of other hats including you know property tax and and obviously sales and use tax and a number of others where that may not be their Forte.


So the the, the primary issue is, is that you know aside from from the expertise you know for sales tax not being as strong as as possible.


It’s it’s also the actual interpretation of of tax case law.


And I think most companies what they do is they end up using you know a CCH or RIA, they use other type of software, they use tax matrices whether internal or external.


They use their ERP systems.


And so all of these systems I think are are fantastic and they work on what I call a category level.


But when you really start breaking things down unfortunately they prove to not be infallible there.


There tends to be issues in, in regards to just the nuances in case law that for whatever reason leads to companies overpaying sales tax or over accruing use tax.


And of course there’s a myriad of, of other issues at hand in terms of if the vendor doesn’t have an exemption certificate on file and they don’t know any better, they’re just going to go ahead and just charge you the tax.


So why we’re here today is obviously for Indiana manufacturing and and like I said at the very beginning, you know the state is is our strongest state for filing refunds.


It’s also one of the most amenable states overall I think for refunds.


And what’s interesting about Indiana is it’s one of the few states where pretty much every area of what I call production constitutes manufacturing.


What I mean by that is that there are a number of states, actually, there’s only a handful of states that really kind of qualify a restaurant and as being a manufacturer or like a metal foundry is being a manufacturer.


Number of states really just don’t look at those as qualifying.


But in the state of Indiana, it comes down to 2 words.


Material change is the production that’s involved, Does it constitute a material change?


And so when we’re looking at just these pictures here for not just restaurants and metal foundries, but also pharmaceutical, beverage, manufacturing, medical products and medical equipment, which obviously is a big one.


You know for Indiana there’s really a lot of opportunities that are availed to Indiana manufacturers to you know, find opportunities you know for cost savings and and to try to try to you know, get that get to that 100% compliance rate just through recovery and a process improvement exercise.


And with that I’m going to turn things over to Joe who will start us off with Indiana sales tax 101.


Thanks Clyde.


So this slide here really just kind of details the high level exemptions available to Indiana manufacturers.


So I’ll just kind of run down the list very quickly and just kind of touch on a few subjects here.


So anything really used in your manufacturing process as far as the large pieces of equipment, that’s all going to be exempt.


Any repair parts or tools or supplies used in the production process, that’s also going to be exempt from sales tax.


As you can see the 5th bullet point down, we notate forklifts and cranes if they’re used in manufacturing.


A lot of taxpayers, manufacturers do not know that if you use a forklift to move a product from point A to point B in the production process, it is actually exempt.


So that that’s a nice one that we encounter quite often.


Your cost of goods, obviously, your raw materials that you’re purchasing, that’s all going to be exempt.


Safety clothing is another one or equipment that’s another one that we really encountered quite a bit.


If it is required on the production floor for every employee to wear, you know, a hard hat, ear plugs, beard net, a hairnet, that’s all going to be exempt.


But the the key there is that it has to be required for everybody to wear as Clyde mentioned earlier, software used in manufacturing.


That’s another big one that we encounter.


Again, if it touches the product or you know if you have, if you have to hit enter on the keyboard to get the production line moving, then in that instance that software that’s being used is going to be exempt from sales tax your packaging supplies.


That’s another big one.


So if you know you’re putting your product into a box, that box itself is exempt because that is the final product that the manufactured part is going into.


So that that’s another big one we encounter.


And then the last point I want to make here is research and development.


So Indiana does provide certain exemptions for research and development companies.


A lot of the consumables used are exempt, any beakers, microscopes, you know your larger equipment to where research and development is conducted, those are also going to be exempt.


Can you also explain the difference between a R&D credit and an exemption for sales tax and R&D?


Yeah, that’s that’s a really good question actually.


So the R&D credit is for income tax purposes.


So when you are claiming the R&D credit on your income tax return, you’re claiming it both on the federal and on your state income tax return.


And there is a laundry list of items that you have to prove to both the federal government and the Indiana Department of Revenue to show that you are conducting research and development.


Now when we’re talking about sales tax, you don’t have to jump through all those hoops and you know prove that you are conducting research and development.


What you need to do is just approach the Department of Revenue and state.


You know we use this in research and development and nine times out of 10, if it’s a microscope, A beaker, you know something that is very straightforward.


The state generally will not question you from that aspect.


However they they are entitled to asking those types of questions just to make sure that that is what it’s used for.


But that is the main differentiation there is that one is for income tax and one is for sales tax.


So the next part here is your prereview process.


So when you’re looking through your records, you really want to kind of figure out how everything is laid out.


You know, whether you’ve been with the company for 30 years or three months, you want to figure out how the invoices are laid out.


Are they in batches?


Are they by vendor?


Are they sorted by check number?


Then you want to kind of figure out how they’re stored.


Is everything in paper and boxes and filing cabinets?


Is everything digital?


You know, we encounter a lot of clients that everything is digital and they no longer have paper invoices on site.


And again, you know, you want to see are all the invoices on site if they’re on paper or are they offsite in a storage facility where you have to, you know, get those boxes shipped to your location.


Another item that we like to look at that we recommend reviewing as well is your use tax process.


A lot of manufacturers are accruing use tax on a daily basis and remitting that to the state on a monthly basis.


So that’s definitely one item that you want to take a look at because there are exemptions out there where you should not be accruing use tax.


So then once you kind of figure out how everything is organized, if it’s onsite, offsite, paper, digital, you really want to take a look at the invoices themselves, obviously your expenses and use tax, but you also want to look at your fixed assets.


As I mentioned on the last slide, all of the large equipment that’s used to produce your product that is actually exempt as well.


So that’s where the fixed asset invoices really come into play.


Then you want to look at your chart of accounts and even a general Ledger detail as well, just to highlight either the accounts where you think you’ll have exposure for overpaid sales tax or you use tax.


And then you can even dial it down in the general Ledger to find specific line items as well.


So then if you have everything on site, you know, just kind of get a team together, whether it’s yourself or you know, a group of people and just kind of figure out how you want to attack the the review.


You know if everything sorted by vendor and you have three people, split it up by threes and scan everything you need and kind of go that route.


You know, one thing that we really encounter between manufacturers and research and development companies is conducting a tour of the facility.


That is, in my opinion, one of the greatest things you can do to really see the production process from start to finish.


When I worked for the Department of Revenue, I toured countless numbers and manufacturers, and it was really the coolest thing I got to do on the job because I could really see everything produced from start to finish.


And it it really kind of opened my eyes as to how things are made here in Indiana, which was great.


And then your offsite review, you know once you figure out what invoices you overpaid sales tax on or overpaid use tax on, what you’re going to do is you’re going to conduct some research, try to figure out where the exemptions lie and then you’ll actually create a refund schedule that you’ll submit to the state.


No, I I I noticed one thing that’s missing here is backup support data from the vendor and and just obviously being in being in our business, one of the things that we have to do in in many of the different reviews that we perform is we often have to go through the arduous process of obtaining you know backup support data from the vendors in terms of being able to substantiate our refund claims.


Is Indiana a little bit different in that sense?


Yeah, to an extent, though most states will require a proof of payment along with the invoice.


However, Indiana does not require that.


Indiana just requires the invoice where sales tax is paid.


Now, if you submit like a purchase order on your refund claims to the state, they will deny that because it’s a purchase order and not an invoice.


So that’s really the only bugaboo that you need to worry about when it comes to submitting invoices to the state.


So the next slide here is sales tax on utilities.


This is a great exemption that is afforded to manufacturers and research and development companies across the state.


So if you are using gas, electric and water in your manufacturing process, there is an exemption to where you can actually have the sales tax removed from your utility bills.


So the process in how you do that is a license engineer would come out and take a tour of your facility and take down the usage ratings off of the equipment used in your manufacturing process.


So for example, if you’re strictly using electricity to produce your product, the engineer will take down the volts, amps, horsepower, watts if it’s single phase, three phase piece of equipment.


And what they’ll do is they’ll put together a formula and they will actually take the kilowatt hours from the most recent 12 months of bills and come up with an exempt percentage that’s used in your production process.


So if that percentage is greater than 50%, then actually your entire bill is exempt from sales tax.


If it’s less than 50%, you’re just afforded that exemption.


And you’re still charged the sales tax on a monthly basis.


You just have to remit a claim.


You can do it monthly, you can do it annually.


You know what however you see fit.


The 4th bullet point down here though is regarding research and development companies.


So although manufacturers are afforded the 50% or more rule, research and development companies are not.


Unfortunately the state has a rule in place where they are only allowed the exact percentage.


So if your electricity if your electricity is used 86% of the time in in in research and development, then you are only afforded that 86% exemption.


You’re still charge sales tax in full.


However you can still apply for a refund like I said either monthly, annually, however you see fit.


And then there’s one more nugget here I just want to bring up.


If you are currently under audit with the state of Indiana and you are not taking this exemption on your utilities, the state should perform a free predominant use study for you.


When I worked for the Department of Revenue, I can’t tell you how many manufacturers did not have a study in place that I went ahead and conducted a study for them and provided them that exemption and provided a refund for that taxpayer through the audit.


So that’s something that again if you’re under audit currently and you’re not already taking this exemption, this is definitely something you need to bring up with your auditor.


Joe, one more, one more question before we we go to the next slide.


What would constitute?


Well, actually two questions.


One, how long is the study good for and also what would constitute having a new study performed?


Yeah, those are actually really good questions.


So the study is usually good for, I would say anywhere from three to five years.


It really kind of depends on how often your business is changing.


If you’re adding on to your manufacturing process, if you’re removing items from the manufacturing process and that kind of goes hand in hand with your second question.


If you’re updating equipment, adding new equipment, adding space to the manufacturing process, then that’s when a new study would be warranted.


I will say if you are already at 50% or greater and you’re adding more, I don’t want to say it’s not necessary to conduct a new study, but it is good to have that in your back pocket.


That way if the state does come back and audit you for whatever reason and you can say you know we added this equipment, that’s only going to bump up your percentage even more.


So this is a copy of what a refund schedule would look like.


This is actually what the taxpayer would submit to the state in order to garner refunds.


As you can see that there are hyperlinks to the left hand side that point to the suspect invoices and a number of states will require not only in a spreadsheet that looks very similar to this, but also a standalone narrative in regards to just basically how you would substantiate the claim.


What type of tax laws are, are you are you you know looking at and essentially kind of putting on almost a lawyer had if you will, just in terms of really driving home why this should be an exemption, Indiana actually doesn’t require that.


So most often this refund schedule here will be all that you would need.


You just need the invoice date, invoice number and and obviously have you know still the reason codes out to the side on the right hand side, but you don’t really have to have anything too you know comprehensive aside from the schedule just just to to get things started.


So as far as the actual filing process is is concerned Indiana again is is a little bit different from a number of states.


So typically what a state will have is, is a statutory period of a three to four years look back.


So you’re going back strictly 3 years from today, you know as as far as your historical records are concerned.


But in Indiana, you actually go back to the calendar date.


So instead of looking at July of 2020 to July of 2023, we can actually all go all the way back to January of 2020.


So a number of times when we’re working with Indiana clients, they’ll often times, unless we’ve been working with them in the past, want us to look at something in the third or perhaps even fourth quarter to where we’re almost looking at 4 full years of statute.


The other part of that process is once a a claim has been submitted to the state, the state must issue a decision within 90 days.


And again, that is very unlike a number of other States and just speaking from experience.


You know we we do a lot of work in Pennsylvania.


You know we’ve had claims that’ll drag on for three, five, 6-7 years believe it or not.


So it is refreshing to see that Indiana on the other hand, you know most often than not they they must issue that decision within 90 days.


And Joe, just real quick, you know obviously being a former state auditor, can you tell me you know what percentage actually needed to go over that 90 day park?


Yeah, you know, I wouldn’t say too many claims go over that and it’s completely dependent upon the issues at hand.


But I would say on average 85 to 90% of claims submitted to the state will get through the review process under that 90 day mark.


But again it it’s completely dependent on the issues at hand, how complex it is and honestly the size of the claim that’s filed.


You know if there’s a claim for $15 million like we submitted back in 2015, that’s going to take quite some time to get through because there there’s a lot of data there.


But if it’s something for you know $4000 the auditor that is reviewing that should be able to get through that and under that 90 day mark pretty pretty easily.


And of course the big take away from this, the reason why they have to do it within that 90 day.


If it goes over 90 days, then the state is actually going to be paying you interest on those refunds, which is again is another thing that very few states do.


Aside from actually getting that hard dollar remedy, which is fantastic, the most important thing really at least in my mind is process improvement.


How do you put those those things in place to mitigate those issues moving forward?


And what I mean by that is how do you implement exemption certificates?


That is really key you know to this whole exercise is not just the fact that you have money that’s been sitting on the table that you should have been you know not paying or not over accruing but how do you correct those measures, How do you you look at your tax accounting process and say let’s go ahead and fix these so we’re not having to fight the same battles.


So a lot of times aside from just exemption certificates that will include going into your legacy systems going into your ERP systems or whatever you use to set your tax flags to perhaps look at recategorizing you know adding some subcategories those types of things so that you can really get down to the most granular level possible.


So tax recovery as a best practice again no company is 100% compliant.


There’s always, always going to be a natural error rate.


I often times will tell folks it’s it’s like the the loose change in the cracks of the sofa.


But when you’re talking about three to four years of statute, you’re talking about companies that are spending, you know, sometimes millions of dollars a year just in terms of of what is going to run their business.


That little small natural error rate that that those loose change in the cracks of the sofa can tend to add up to some big dollars.


So you have states that change exemptions often.


They’re never going to tell you when they’re going to be changing these, these exemptions.


You have to stay on top of that.


So where that be, you know, rate changes or expanding the law or or or limiting the law in regards to what an exemption entails, it’s important to stay on top of that.


The other thing is like I mentioned earlier, you know, when in doubt, the vendors always going to charge tax, they’re they’re not going to do anything different unless they have an exemption certificate in place.


It would be like a nonprofit going to a retail store and and when they get charged for tax or saying wait a minute, you know we’re a nonprofit, well, they didn’t know that.


So you have to make sure that obviously when you work with your vendors, if you have exemption certificates that they are fully aware of that otherwise you’re going to be charging the tax.


And then of course you also just have human error you got, you know the, the accounts payable aspect, I can’t tell you the number of times where we we come in and we’ve done a refund review for a client only to find out that we found overpayments, we double payments, we found different things that are outliers of of that process, not necessarily refunds per se.


Well, they are refunds, but it’s really more or less it was just a human error in terms of the process, not necessarily an exemption that wasn’t taken.


Obviously you have new technology that’s always going to you know work against some of the art, the, the laws that were passed, you know previously, again a number of these laws were written, you know 10/15/20 years ago.


And so a lot of the things that are going on today that are going to impact that, they’re not taking into account.


And then obviously you also have, you know a lot of mixed invoicing which is something that we see quite frequently where on on one invoice you’ll have several items that are taxable and several items that are not and they just go ahead and just just do the whole thing as tax.


So those are some areas to to stay on top of.


On top of that, I always ask why tax recovery now?


Why, why would you need to do this now and not not wait?


Well, a few different reasons.


One, if your company has been expanding, if it’s been changing its business, if it’s been you know adding new new equipment and new lines where you’ve been implementing some new software, those are going to be very good reasons to do that because you probably have some big ticket items.


Another one that we get quite often is acquisitions and mergers because how would you know what the other cooks in the kitchen are doing and if they’re doing it correctly.


And what I mean by that is we we’re working with a company right now where they just merged with another company.


But the the the one you know that I’ve been dealing with is going to actually have the say so over tax.


They have absolutely no idea what the company they just acquired has done in regards to sales tax nor do they have the time or the personnel to to start going on a fact finding mission historically to see if they’re doing anything incorrectly.


And then furthermore that the company that merged with them just happens to be in different states that they just do not have the experience working in.


So that would be a good reason.


The third one obviously is if there’s not been an audit within the statutory period.


So you could have had a situation where you came under audit and it was a net zero or you ended up getting a credit.


If if it’s either one of those, you’re usually just going to be left off the audit cycle altogether.


And of course, it’s up to the taxpayer to go ahead and take advantage of that statute, not leaving those dollars on the table before it runs out because once that the statutory period runs out, which is on an obviously a daily occurrence, obviously you’re losing those dollars if you’re not able to go back and and get them.


Lastly, we often times will get approached by companies that are implementing a new ERP system where they’re spending a lot of money in terms of how do they set their tax flags correctly.


And they’ll want to go through a recovery exercise just to make sure that there’s not anything that they’re going to be leaving.


Obviously for what’s in the future, they’re going to be telling all their folks this is the the proper way we want everything done.


And of course, if they’re leaving a lot of bread crumbs i.e.


dollars on the table, it would be nice to know that before those implementations go go into process.


I always look at, and this is actually a real world example for me when I first started with Tax Matrix is I went out to a client and even though I don’t do the physical work, I I came out there and I was going through files and boxes.


This is you know way before the days of of COVID and we were you know starting to pull invoices with you know $20.00 of tax or $15.00 of tax, $50.00 of tax, things like that.


And I started to say to myself you know we’re we’re going to be spending a lot of time and effort just looking at you know these really low you know dollar amounts.


But what I was missing is the fact that a number of these purchases are done maybe 10-12, you know 20 times you know a month and when you look at that over the course of a three you know plus year period of statute it can really you know tend to add to some big dollars.


Again you know that final take away if anything is process improvement is, is the key you you’ve got to try to fix those issues moving forward aside from just the Hooray, Hooray you know we we were able to bring some dollars in.


So now I’ll turn everything back over to Joe for a couple of case studies.


Yeah, thanks, Clyde.


So this is a small manufacturer that conducts a little bit of R&D as well.


So I was actually the one that conducted this review and I was on site for one day, reviewed 3 years worth of invoices, scan them into our system, look over 2 weeks later, we had a predominant YOU study performed in about two to three weeks.


After that we filed the sales tax claim and the utilities claim.


So it was you know about 60 ish days later, give or take 70 days when the state made their decision.


So All in all we filed right around $200,000 between utilities and sales tax and our total win amount amounted to just over $170,000.


So some of the issues that I uncovered during that review obviously are the utilities where they were using electricity and their manufacturing and research and development process.


Laboratory equipment was a big one, Consumables used in manufacturing and research and development.


Your computers, computer equipment, like we had mentioned earlier, software is a big one.


So not only is it software that’s exempt, but the computers themselves can be exempt as well.


So that’s another small take away.


And the last thing that we found was safety equipment.


Again, like I mentioned earlier, a lot of people don’t know that if it’s required on the production floor, then it is exempt.


So that was a really good fine that we had there.


And then here is a large manufacturer that we did a review for.


Again, they are a manufacturer that also conducts research and development.


There are two sites for this one.


So it took us about 5 days to get through all the invoices.


And as you can see there was a bit of a gap between when we finished review on day five to when a predominant youth study was performed.


We had quite a few questions for the client related to the use of items and what location the items were used for.


And then you know after couple days after that we filed a claim for sales tax.


They actually over remitted use tax as well and the utilities claim and then as you can see it’s almost 100 days later where the state made their decision on the utility sales and use tax claims.


And All in all we ended up netting about $1.1 million and the issues were pretty similar from the small manufacturer to the large.


Again you know this is just on a larger scale, no I I just noticed that this actually did go over the 90 day mark.


Is that final win amount, does that actually include interest?


Yes so it does.


So when we were working with the auditor on this claim, you know once that 90 day mark hits the state really kind of kicks into high gear because they do not want to pay interest at all if they can.


You know obviously like I mentioned earlier, it’s completely dependent on the issues at hand, but this was one that they were very adamant that they wanted to get closed as soon as possible.


So now I’m just going to touch on audit defense.


For those of you that are currently under audit, you know from start to finish when the engagement letters sent out to when the auditor first comes out to review invoices, to closing the audit, it’s anywhere from three to six months.


It really just depends on how big your business is and how quickly the auditor is going to get through everything.


Couple points I want to make as far as your defense for the audit.


What will happen is you’ll receive a letter from the state that will outline various items that the auditor is going to request.


And you know, just provide those items, don’t provide extra to the auditor.


If they need more information, they will request it.


So by no means don’t stress yourself out by having to provide everything on that list.


You’ll have an initial conversation with the auditor and they’ll kind of go over what they’re looking for.


And it may not be everything that’s on that letter as well.


And you know the next point here is going over a sampling method.


So a lot of times the auditors will look at a sample of invoices where you are charging sales tax to your customers and then they’ll also look at invoices where you are being charged sales tax for various items that you’re purchasing.


So when they are doing that, you just want to make sure that the sampling method is correct.


You want to make sure their formulas are correct because that is a common error just across the state, really, not so much the Indianapolis office or anything.


But that’s one thing you definitely want to double check with the auditor to ensure that they’re removing all invoices where sales tax is paid.


You know, if you pay use tax on anything, you definitely want to bring that up as well because that’s something the auditor may forget to review as well.


And the last point I want to make here is in regards to credits in the audit.


So for example, I had an audit years ago when I still worked for the Department of Revenue where I actually provided a refund to the taxpayer.


It doesn’t happen very often cuz as you can see at the top of this slide, 83% of sales and use tax audits result in assessments.


So I was actually in that 17% where we provided a refund to the taxpayer.


If you have any refunds or credits that you are aware of, be sure to bring those up to the auditor during your audit because they will give you credit for that and that could offset your assessment at the end of the day or it could result in a refund directly to you.


So now post audit procedures.


So now when the audit closes, what’s going to happen is the auditor will submit the audit to their supervisor.


It’ll go through a review process.


Once it clears that review process, you’ll receive a letter in the mail or in your in time account and essentially it’ll tell you what happened in the audit.


If you have an assessment, the biggest thing to take away in that letter is you have 60 days to file a letter of protest once the audit has been completed.


So if the auditor did make, let’s say, $100,000 assessment, you can actually file a protest on that and you can file up to that $100,000 amount.


So that’s really kind of a keynote to take down here because if you are in disagreement with the auditor, then you definitely want to have you know all your ammo ready for that protest and to kind of go hand in hand with the credits that I had mentioned previously.


If the auditor does not address any credits or refunds during your audit and they’re not included in that final assessment or refund, you still can file a refund claim with the state of Indiana as long as it’s not addressed in the audit.


So that’s definitely advantageous if the auditor does not put that in the audit.


So the last thing I want to talk about here is a managed compliance agreement.


So what the state calls this is a sales and use tax compliance agreement or they shorten it and call it a suitca.


So essentially what this is is a a larger sample that is reviewed based upon accounts that you and the state agree on.


Once you come to an agreement on those, what will happen is the state will create a sample or they’ll create a spreadsheet where they pull a sample from those accounts and they’re going to want to review those invoices to create an error percentage.


And that error percentage will then be applied to those selected accounts and use tax will be remitted on a monthly basis.


And one thing to note here too, assets are generally not included in these types of agreements simply because those purchases are going to be so large that they’re just one off purchases and they’re going to kind of skew that number in the wrong direction for both you and the state.


So they really want to try to exclude those as much as possible.


And again, it’s really just a case by case scenario.


So once the error percentage is established and you’re now remitting tax on that error percentage to the Department of Revenue, you will actually want to issue a direct pay permit to your vendors in those selected accounts.


Because now with that error percentage you no longer have to pay sales tax to that vendor because you’re remitting use tax to the state.


And then the last thing on these, they’re generally good for about 3 years.


So it really is advantageous, especially if you’re a larger manufacturer to do this because then your accounts payable team doesn’t have to search invoice by invoice to figure out what if you paid sales tax.


Two, if you didn’t then do we need to remit use tax on this.


That kind of eliminates a whole lot of back end work and your accounts payable team can really kind of allocate their time elsewhere.


So Joe, before we move on, a couple of questions.


One, can you possibly constitute what would be a large manufacturer?


And then Part 2 is after I’ve went through the managed compliance agreement exercise for that three years, can I reapply?


Yeah, so a large manufacturer is really dependent upon the state classifieds them as classes.


So I believe it’s $100 million in sales or more a year would be like a Class 5.


So generally you know those those types of manufacturers, they are more than likely going to enter into this agreement because their accounts payable team has quite a bit going on in this like I just mentioned kind of cuts down on what they have to do here for sales and use tax.


And to answer your second question, essentially what you would need to do if you’re not under audit, you just approach the state and say, hey, you know, we entered into this agreement three years ago, We would like to continue doing so.


How do we do so Most of the time the state will either want to review those same accounts and just you know, see what the error percentage comes up to.


They may just ask you to resign the agreement.


Again, it’s all case by case scenario.


It just depends how much your business has grown from when you first entered into the agreement versus when you’re approaching the state the second time around.




So before we get into questions, I just want to talk a little bit about what our value proposition is as a firm.


So essentially we handle everything that’s in the sales and use tax bucket.


I would say certainly sales and use tax recovery and audit defense are are going to be our two key services where we work with companies nationwide on on a myriad of of issues.


But we worked a number of audit defense and recovery engagements especially for multistate manufacturers.


As far as just the breaking down the main elements, we actually perform our service 100% on a success basis because there’s no crystal ball, there’s nothing to show us specifically what we’re going to find.


It’s not like bringing in a big account accounting firm and they’re going to be doing something with a set deliverable.


At the end of the day there is no set deliverable.


So all all we can do is try to bet out and and see if there is going to be some possible opportunity and then we’re willing to to go ahead and and and take on the exercise with no upfront fees or costs.


So the only billable event is after you physically receive a check from the state or the vendor.


And the reason why I use vendor is aside from from Indiana, there are a number of states where you have to file refunds directly with the vendors, which is really an entirely, you know, different process.


But we handle all of that and we also handle all the heavy lifting.


So it’s not a situation where we need a whole lot of of headway, aside from just pointing us into the right direction in regards to the.


A P invoices, use tax accruals, chart of accounts, cost center listing, you know, just kind of those basic elements and then it’s off to the races.


If there’s a predominant you study that’s needed will actually bear that cost.


So the taxpayer does not come out of pocket at all, you know, upfront especially I mean obviously if it’s needed to improve a refund position.


The big take away and like I mentioned before is process improvement.


So we’ll actually set up a post review process improvement training session to essentially go over everything that we found, how we found it and then we’ll help the the client implement exemption certificates or answer any questions.


There been numerous times where companies have had a P turnover, they brought in some new folks, maybe they needed, you know, some remedial use tax training.


We’re more than happy to do that as well.


There’s never any cost for that.


Also another you know big differentiator for us is we have a free tax help desk.


So a part of our company all, all they do is research across the board.


And So what that service entails is if you have any, you know what I call at the point of invoice questions, you know where a vendor is charging you tax or maybe you’re going into a new, a new state or maybe you’re looking at a construction contract or things of that nature and you just don’t have the time or or maybe you know the answer, but you can’t find the tax law.


You just want to make sure you can reach out to our free tax help desk to answer those ad hoc sales and use tax questions.


And if you are a client for recovery or audit defense, you get that 100% free for one full year.


What’s the catch again, I I always hear that whenever I kind of explain our our value prop, there is none.


I mean basically it’s eat what you kill and and there’s zero cost to the taxpayer if we are unable to either find dollars coming in or we’re able to not you know find ways to decrease an audit assessment and everything sits on a one page engagement letter.


So I I actually already had a couple of questions that came in.


I know we have a little bit of time left.


One question that came in was in regards to forklifts and this cut.


This taxpayer has been using these forklifts not just strictly for manufacturing or not just strictly for distribution, but a little bit of both.


And so I know you mentioned earlier that you know forklifts will be exempt if it’s used in the manufacturing process.


Is it, is there a way to kind of project out what the usage would be percentage wise or is it kind of all or nothing?


Yeah, that’s a really good question.


So you can actually percentage your forklifts, it’s completely dependent upon the use of them like I had mentioned earlier.


So if you’re using that forklift to move raw materials into the production process, then that’s going to be exempt.


If you’re moving the product from point A to point B in the process, then that’s going to be exempt as well.


Once you take the final product, when it’s wrapped in a box with a bow on it, you know however it needs to be shipped out, then that’s when it becomes a taxable event.


So if you’re using the forklift to move the pallet onto the truck that’s going to be shipped out, then that’s taxable.


The rule I used when I worked for the Department of Revenue, I used the quarter percent rule, so 25 fifty 75100.


For me it was just easier to do the math that way.


But if you’re able to track it, you know, fairly easily, as far as you know, 86% of the time this forklift is used to move product in the process, then by all means use that.


And when you submit that to the state, then, you know, just explain that.


And if the auditor who’s reviewing it agrees with it, then they’ll grant that or you can kind of go back and forth with them.


OK, great.


Another question is it is regards exemption certificates.


So basically the taxpayers asking, I guess they’ve had some hesitancy about taking an exemption certificate.


And so they’re wanting to know, you know, does the vendor have to accept it and what, what are the rules for that?


And then what does the vendor have to do, especially if they’re selling something that should be exempt.


So the when you pass an exemption certificate to your vendor for whatever you’re purchasing, let’s just say it’s raw materials.


The vendor does not have to accept it, but they accept it in good faith.


Assuming that you are providing that exemption certificate for a resale purpose or an exempt purpose.


So then when the vendor goes to their supplier to purchase that raw material, the vendor will actually provide their exemption certificate to the supplier and say, hey, we are reselling this material back to our customers.


So that’s why we’re giving you an exemption certificate.


So I hope that answers that question absolutely.


So this is the conclusion of our webinar.


I really appreciate everyone’s time.


Like I said, I will be sending out a personal link to everyone that’s on this on this feed with a link that they can peruse at their leisure.


You can feel free to reach out to myself or Joe if you have any questions.


Additionally, like I said, this will be recorded.


It will be part of content for our website.


I will also be sending out everyone a link.


That way if they have you know, questions or things that they missed that they they would you know, rather you know hear us talking about they can certainly do so.


So with that, I really appreciate everyone’s time and everybody have a fantastic day.


Thank you everyone.



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