Sales Tax Recovery: Cost Savings During COVID-19
Last Updated on August 18, 2022
As we face tremendous challenges due to the COVID-19 outbreak, “cost savings” is paramount to a company’s survival. With brick and mortar sites closing, salary cuts and, unfortunately, layoffs, there is a way for tax and accounts payable teams to enhance liquidity to become a revenue driver: sales tax recovery.
Sales tax recovery, otherwise known as a refund review or reverse audit, is based upon examining accounts payable data (fixed assets and expenses), along with use tax accruals. Most states allow look-back periods of 3 to 4 years of purchasing whereby taxpayers can file for refunds, regardless of audit status.
Any tax department is stretched thin during normal circumstances where sales and use tax is relegated to the backburner. The current environment is even more difficult to navigate with personnel working remotely and tending to personal health and family needs. This scenario is ripe for a success-based recovery effort where the consultancy firm must perform all of the heavy lifting sans upfront costs to share in the savings. There are a few key variables:
WHAT INDUSTRIES?: Virtually every industry is susceptible to overpayments of tax based on state exemptions and interpretation of tax case law. Some industries that have enjoyed prior success include manufacturing, retail, pharmaceutical, high-technology, banking, law firms, hospitality and restaurants.
WHY TAX RECOVERY?: Aside from the cost savings aspect, companies in the aforementioned industries that pay and/or remit material dollars in sales and use tax may be good candidates for tax recovery. Companies that have recently (within 3 years) experienced growth via expansion, acquisition or mergers may have opportunity due to unique, increased expenditure. A/P turnover, especially when a company lacks sales tax expertise (not taught on a CPA exam), might necessitate a review to correct prior tax paying methodology. A company that operates in a multi-state footprint adds numerous variables as every state’s take on an exemption is different. If a company has not been audited in a while and had a prior net refund, said company may be deemed a friendly over-payer with overpaid tax being lost to statute.
HOW DOES IT WORK?:
A: Surmise opportunity based on the amount of sales tax being paid/use tax being accrued on purchases. The consultancy firm does not charge a fee for the review and only benefits if dollars are recouped via contingency or success fee.
B: Electronic Data Access: The key to a successful recovery effort is gaining access to the requisite A/P files. If files can be accessed remotely, regardless of the pandemic’s status, a team of consultants can peruse that data to determine refund potential. Below are ways the data can be accessed without physical interaction:
- VPN Access
- FTP Upload
- Dropbox, OneDrive, SharePoint
- Loaded Laptop, Hard Drive, Thumb Drive
C: Data Review: Outside of an audit, A/P data will be reviewed up to statute (generally 3 to 4 years) to determine where tax may have been overpaid/over-accrued. Upon clarifying usage, a schedule or schedules will be created outlining said opportunity that must be approved by the client prior to filing.
D: Refund Filing: Refunds can be filed directly with the state or vendor. In some cases, the taxpayer may even take a credit on their return. When a claim is filed, it will have all the necessary information, which may include associated invoices, proof of payment, narrative detailing position against state statute, and utility studies or physical verification of operations.
E: Timing: Refund claims may take a few months to clear while others may take over a year, depending on the state, filing jurisdiction, filing amount and nature of the exemption being taken. Some states can pay fairly quickly, while others may take extra time. Vendors can issue credits instantaneously, sometimes by just making a phone call.
F: Consultant Compensation: A success-based review is performed complimentary with no upfront fees or costs, so the only billable event is “after” the taxpayer receives refunds. The exercise is budget neutral, and in many cases, can improve your bottom line and increase cash flow. As a secondary benefit, many consultants offer free training to mitigate those issues moving forward.
INTERESTED IN COST SAVINGS?
For 21 years, TaxMatrix has been a leader in sales and use tax recovery for clients nationwide. If you would like to set up a consultation to see if your company might be a good candidate for a success-based tax recovery, contact us today!