Sales & Use Tax Recovery Benefits for Indiana Pharmaceutical and Manufacturing Companies

Last Updated on August 18, 2022

Sales and use tax is often an afterthought for many production-centric taxpayers, but there are nuances in case law that can lead to material overpayments. Fact is, unless you keep track of case law changes, you could very likely not be taking advantage of exemptions on fixed assets and expense purchasing. 

Sales and use tax is not taught on a CPA exam, and unfortunately, it’s a proverbial ping pong ball volleyed across departments – from shared services to accounts payable to the lone controller juggling other financial functions. As we move toward the “new normal,” finance, much less tax, teams do not have the personnel to see if they are leaving money on the table. Even in a state like Indiana where the environment is ripe to pick up extra dollars, why, how and when would a spread-thin finance team navigate that process?

Sales Tax Recovery AKA Refund Review AKA Reverse Audit AKA Best Practice Cost Savings

Why?

Indiana is one of the most amenable states for sales and use tax refunds. It is one of the few states that realize when a refund claim is filed, it must be reviewed expeditiously, otherwise interest can accumulate. Thus, all sales and use tax refunds filed must receive an answer from the State within 90 days – good, bad or indifferent.

Many states allow the taxpayer to file refund claims for historical purchasing up to 3 years, but in Indiana, it is by the calendar year. So even a claim filed in December 2021 can include purchasing from January 2018. This allows the taxpayer extra time to include purchasing that would otherwise be out of statute.

Indiana-based pharmaceutical/biotech and manufacturing companies have very favorable sales and use tax exemptions. New equipment, R&D, software and utilities are all solid areas to review for possible overpayments of tax. For utilities, an apportionment or utility study is needed, as taxpayers are exempt from sales tax on utilities used in production.

Finding dollars in improve your bottom line and increase cash flow is great, but why not mitigate those issues moving forward? A sales and use tax recovery project will ultimately improve efficiencies moving forward as the taxpayer would continue using those exemptions and/or having exemption certificates in place.       

How? 

Taxpayers without the internal resources to take on such a project can elect to use a sales and use tax recovery firm. These firms typically operate on a success basis with no upfront fees or costs. In other words, if they do not find anything, you do not owe anything. Thus, it is a budget-neutral, cost-savings exercise with no downside.

A/P invoices for fixed assets and expenses over the calendar three-year period is key to performing a refund review. But how to approach the data? Recovery firms typically work within the framework of what is comfortable for the taxpayer: first or third-party remote access, onsite access, Iron Mountain, and sometimes dusty warehouses with or without spiders. In addition to the invoices, other items needed may include a cost center listing, chart of accounts and a general ledger download. Given taxability is derived by usage, a plant tour can also be extremely hopeful as invoices alone don’t tell the whole picture.

Once the invoices and associated data are perused, an internal schedule of findings will be created with hyperlinks pointing to suspect invoices, tax broken out and reason codes assigned to exemptions. The taxpayer will review the schedule to see if overpaid tax is material enough to file with the state. Upon approval, the recovery firm will reach out to associated vendors for backup support data and begin petitioning the state for hard-dollar relief.

Since Indiana has to render a decision within 90 days to avoid paying interest, the tax recovery firm may file several refund claims broken out by issues, as some may be more substantive than others. EXAMPLE: If tax is paid on utilities and a utility study is performed for validation, those claims may be filed separately as the State has no choice but to issue a refund. Also, as part of an external engagement, many recovery firms will pay to have the utility study performed, which is an extra benefit to the taxpayer.

In most recovery engagements, the taxpayer’s only billable event stems from physically receiving a check from the State. Contingency or success-based fees may vary dependent on the opportunity. From a post-engagement perspective, many recovery firms will offer complimentary training to mitigate the issues that were found, so the taxpayer reaps those benefits and keeps all future dollars in-house.

When?

Even though using an external tax recovery firm is relatively painless, a taxpayer needs nominal time to schedule the review, decipher the data access issue and clarify tax usage. Sales and use tax is not a front-burner issue, but after satisfying federal tax and quarterly filings, there may be a window where this exercise makes sense. 

The taxpayer should also be cognizant of when they were last under audit, or have they? Has there been a change in purchasing, i.e. new construction, new equipment, new expansion and/or new acquisition? Does the taxpayer believe they have sales and use tax on purchases under control, or is it a function using legacy tax flags, tax matrices or departments lacking in sales tax acumen? The “When” for any taxpayer is variable, but if the timing is right, a sales and use tax recovery effort can deliver a big pay-off, giving you peace of mind that you only pay your fair share.

Celebrating our 22nd year in business, TaxMatrix is a leading sales & use tax recovery and audit defense firm that works extensively in Indiana with area manufacturers and pharmaceutical/biotech firms.