Increasing Sales Tax Costs Hidden in Plain Sight!
During these inflationary times the cost for goods and services is going up. So is the sales tax on those taxable goods and services.
Be sure to audit your A/P invoices for costly sales tax inflation!
The sales tax rate is not increasing but the sales tax costs certainly are!
Are you paying sales tax on exempt transactions?
Business cycles come and go. Numerous factors influence the length and breadth of any business cycle. A once in a lifetime pandemic – hopefully once – appears to be one of those factors.
As the economy rebounds from the disruption caused by the pandemic, production output is increasing at a rapid rate. So are the costs of goods and services.
The corresponding sales tax must be paid on those inflated prices – which can be quite costly!
After a product has gone through all the various manufacturing and resale stages the ultimate consumer will eventually bear the burden of paying sales tax on the inflated unit price. That price inflation will be gradual.
But manufacturers are getting especially hard hit NOW as supply, demand and productivity are strained.
To illustrate: Certain commodity prices have risen from twenty percent to two hundred fifty percent over the past year. The cost for labor and services also appears to be rising at an accelerated rate. And nobody knows for sure how high the prices will go. A one hundred percent increase in the cost of taxable purchases equals a one hundred percent increase in sales tax. Purchases at last year’s prices, in the amount of $100,000, taxed at a 7% rate resulted in sales tax of $7,000. This year those same exact items cost $200,000 and the sales tax is $14,000. The higher the prices rise the higher the sales tax also rises on those transactions.
Increase the price and quantity of purchases, and add the corresponding sales tax, then multiply by three or four years – or ten – and it gets quite expensive! Continually rising prices and sales tax costs can significantly impact profit margins.
To compound the problem of rising costs many companies unknowingly pay sales tax on nontaxable items. Businesses that erroneously pay sales tax on an increased volume of purchases, at higher prices, waste a significant amount of capital. The loss is exponential.
More concerning is that many of those erroneous payments could be lost forever.
All Is Not Lost – B2B Sales Tax Overpayments May be Recoverable
All forty-five states in the USA, with a statewide sales tax, have a statute of limitations on recovery of overpaid sales and use tax. The statute ranges from three to four years depending on the jurisdiction. Your company can potentially recover overpaid sales tax for those periods if a refund request is properly executed.
Most of those forty-five states also have specific sales tax exemptions for manufacturing entities, Research and Development and certain industries treated favorably by their jurisdictional legislatures.
The combined local and state sales tax rate for those forty-five states ranges from 4.44% to 9.55%. The example above is about in the middle of that range of rates at 7%.
In my twenty-five years of sales tax experience, I have found that many established, expanding, and new companies are unaware of numerous of these exemptions. They inadvertently pay sales tax on those exempt items year after year. Those errors become significantly more costly during inflationary times. Like now.
It is simply good business practice for any company with significant cost savings potential to periodically conduct a thorough comprehensive and professional sales tax review of their vendor purchases to stop wasteful spending and preclude loss of overpayments. A fresh set of independent objective eyes that specializes in identifying overpayments can be an invaluable asset.
Immediate savings can be realized when erroneous payments are identified and stopped on a go forward basis. And recovery amounts can turn costly errors into a substantial windfall.
The Times They Are a Changing – Remote Sales Tax Audits Are Here
This horrible pandemic has sent shockwaves around the world. As the United States economy comes roaring back many states are becoming more aggressive in their effort to raise revenue. Their sales tax auditors have been performing “desk” or “remote” audits where they have no in person contact with the companies they audit. They issue their audit notices, list the documents required for audit and perform their audit remotely – from their home or state office.
These Departments of Revenue have indicated that they will continue this approach indefinitely.
The trend is clear. Mandated electronic filing of sales and use tax returns is required in many jurisdictions. And with the internet, the cloud, encrypted data storage and transmission, digital and electronic records, machine learning and artificial intelligence it is just a matter of time before all jurisdictions are performing remote desk audits – exclusively.
The lack of personal face to face contact between auditor and audit target can lead to considerable confusion, delay, contentious relations, and significant loss of time and money. Technology does not always make everything easier.
Even though the same fundamental principles apply in each jurisdiction, sales tax laws can be quite confusing. Each jurisdiction has its own statute related to taxable items, exemptions, tax rates and statute of limitations. Changing statutes, regulations, appellate tax board rulings, state and federal supreme court rulings, administrative provisions, technical information releases, letter rulings, and memos can make proper guidance difficult to find especially during this transition to the digital audit world.
Help is Just a Click Away at B2B Sales Tax, LLC
In person and/or remote sales tax audits can be quite frustrating for any audit target. The same can be said for any entity filing a sales tax refund. It helps to be experienced and technically proficient in both sales tax law and electronic audits when working in the digital age. Understanding how the statute applies to your position and being able to interpret and apply that statute with proper documentation to validate your position is a learned skill.
If you need help in managing audit defense, performing a refund review or any sales tax issue contact B2B Sales Tax, LLC. With more than 25 years of multistate sales and use tax experience in the public and private sectors we can save you time, money, and aggravation now and for years to come.