As companies continue to search for ways to cut costs, they be missing a golden opportunity to not only cut costs, but to receive cash from state governments. I am talking about a hidden expense that is part of nearly every purchase a company makes – sales tax. In certain situations, some of which are very common, companies overlook opportunities to reduce their sales tax liability by maximizing exemptions and requiring vendor invoices to separately state taxable goods and services and nontaxable goods and services.
Maximizing exemptions
Texas, and all other states imposing sales tax, offers a wide variety of exemptions from sales tax. The most common exemption is the resale exemption, which exempts purchases of tangible personal property that is purchased for resale. Companies generally do a good job of utilizing the resale exemption, but often fail to take full advantage of other available exemptions. Even if a company’s CFO or controller is aware that certain purchases should qualify for an exemption, that knowledge may not always be conveyed to the purchasing manager or business development personnel who actually receive and pay the relevant invoices.
For example, Texas offers an exemption for property used or consumed in, and essential to, the manufacturing, processing or fabrication of property for sale. The manufacturing exemption applies in many situations, some of which may not be obvious at first. For example, exempt manufacturing equipment includes computers used to write computer programs and microwave ovens used by restaurants. Companies do not have the time or technical expertise to identify all the occasions where the manufacturing exemption (or other lesser known exemptions) could apply. Further, any subsequent repair or maintenance services, which would otherwise be taxable, would be exempt if performed on exempt equipment.
Separating taxable and nontaxable goods and services
Companies will often be purchasing both goods and services from vendors and contractors. Where a single charge is made for taxable goods and services as well as nontaxable goods and services, the entire charge becomes subject to sales tax. The amount of sales tax due could easily be reduced by requesting invoices that break out taxable and nontaxable items.
Conclusion
With a sales tax rate over 8% in Texas, overpayments of sales tax could prove to be substantial. Fortunately, Texas offers a 4-year statute of limitations during which taxpayers can request refunds of overpaid tax, along with interest. By performing a review of its purchase invoices and internal sales tax procedures, a company could recognize significant future savings and recover overpaid taxes for the prior 4 years.
DISCLAIMER: The materials available in this blog post are for informational purposes only and do not constitute tax or legal advice.
