Overpaying Sales Tax? Here’s how to recover your capital

At a glance

• The main takeaway: Companies that have overpaid sales tax for certain purchases can file for a refund with the help of a knowledgeable advisor.
• The impact on your business: Recouping capital refunds on large expenditures can enable businesses to reinvest a substantial sum back into their company.
• Next steps: Businesses can conduct an overpayment review process to identify overpayments and begin to reclaim them, with the help of an advisor.

Schedule a consultation with Aprio’s Sales Tax Overpayment Services team to learn more about how you can minimize overspending and maximize tax savings.

The full story

Sales tax compliance is notoriously complex, with rules that vary not only by state but often by locality, product type, and transaction structure. Applying these rules in real time can be incredibly challenging for companies, especially when tax guidance is ambiguous or inconsistent. When tax rules are unclear, companies often default to paying tax “just in case” to avoid audit risk. To avoid potential penalties and interest, many businesses take a conservative approach of paying the sales tax vendors apply to their invoices. This can result in overpayment of sales tax on truly exempt items. While this minimizes audit risk, it can lead to significant and unnecessary tax costs over time. Companies that make substantial investments in new equipment, implement new technologies, experience mergers or acquisitions, or expand business into additional states tend to be at a higher risk of overpayment.

Manufacturing, healthcare, construction, data centers, and aerospace are typical industries where sales and use tax overpayments occur; it can also be common among government contractors. These sectors often have purchase activity exemptions that could be eligible for special tax treatment; however, understanding the potential breaks available to these industries requires deep knowledge of relevant tax regulations and their evolution through ongoing tax court cases.

Sales and use tax overpayments are rarely intentional. There are many reasons why companies overpay sales tax, often without even realizing it. A few key reasons include:

• Legislative changes or new court rulings,
• Incorrectly sourced transactions by vendors,
• Taxed items that qualify for an exemption (e.g., production supplies, manufacturing machinery, resale items, etc.), and
• Tax engines or ERP systems may be misconfigured or use outdated taxability codes.

Fortunately, rectifying overpayments via refund claims can be a low-risk process, often with high reward. A seasoned advisor will have experience leveraging court rulings and tax regulations in innovative ways unique to individual companies’ fact patterns to identify refund opportunities.

Taking control of the process

Companies struggle with having the capacity and expertise to review historical activity and quantify refund opportunities. Engaging experienced indirect tax professionals to review your records is the most efficient way to identify potential overpayments and quantify your refund opportunity. Acting quickly is essential—most states require refund claims to be filed within a limited statute of limitations, typically 3 to 4 years from the date the tax was paid or became legally due. Having an indirect tax professional quantify and file a protective refund claim ensures you preserve your rights under the statute of limitations, helping to expedite cash recovery and maximize your refund. 

Reclaiming your capital

When sales tax overpayments are identified, an indirect tax advisor can assist in filing refund claims with the applicable state or vendor to recover the funds. The process and documentation requirements for submitting a claim vary depending on the amount and the jurisdiction. Larger refund amounts typically prompt greater scrutiny, making it essential to work closely with your tax advisor to prepare a well-supported and defensible claim.

Fortunately, this process generally carries minimal risk. Overpayments often stem from businesses taking conservative tax positions, meaning the tax has already been remitted, eliminating the risk of penalties or interest for underpayment. A refund claim simply asks the state to evaluate the facts and determine whether the overpayment is valid. At worst, the claim is denied. At best, the state agrees, and your company recovers previously paid funds—unlocking valuable cash flow.

The bottom line

Sales and use tax can be difficult to calculate accurately, especially as evolving court cases constantly create new jurisdictional impacts. Pursuing compensation for overpayments can also take time, knowledge, and resources you may not have. 

Aprio can help. Our Sales Tax Overpayment Services team uses a strategic approach to identify overpayments, leaning on their deep industry experience and close monitoring of relevant jurisdictional changes. Aprio’s unique skill in thinking outside the box to apply tax laws and court rulings in unique ways enables companies to recoup substantial refunds and minimize future overspending.