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Help Clients Find a Little Golden Sales Tax Refund in Their Stocking

Nov 30th 2016
Senior Manager, State and Local Tax Department Clark Nuber
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Here’s hoping your 2016 – and the work you did with your clients this year – was prosperous and successful.

Closing the books on your clients’ businesses is not only a routine accounting function, it’s a necessity and strongly encouraged by tax authorities. The impending new year is also a time of reflection on a company’s financial performance. Sometimes, even after a whole year of incredibly hard work and careful planning, the difference between red and black can be razor thin.

A relatively obscure, but occasionally effective, way to nudge a company’s annual results into the plus zone is a sales tax refund. For companies that collect sales tax on their sales, or for businesses that pay sales tax on purchases, chasing down a sales tax refund may be a reasonable and cost-effective way to bump the bottom line.

Clearly, a sales tax refund engagement is not appropriate for every business or scenario, but refunds are available in a number of instances and might just represent an unpredicted bonus.

Here are two broad categories of potential sales tax refund sources:

1. Bad debts of vendors that collect sales tax. Because a majority of businesses collecting sales taxes are accrual-based taxpayers, invoices are regularly recorded, and the related transaction taxes remitted, prior to actual collection of balances due. In the unfortunate example when a customer does not pay, a vendor is usually entitled to a refund for sales taxes remitted.

Much like in the income tax realm, states require impeccable documentation and recordkeeping, but any business that has its billing house in order should already have the documentation necessary to support a successful refund claim.

In general, a company hoping to claim, and actually receive, a sales tax refund must record and be prepared to make available:

  • The name of the purchaser.
  • The date of the sale.
  • The price of the property or services.
  • The amount of sales tax charged.
  • The amount of interest, finance, and service charges.
  • Whether the property was retained by the vendor or seller or repossessed.
  • Amounts charged to the debt representing costs of collection.
  • The dates and amounts of any payments made on the debt.
  • Records of the portions of the debt that represent charges not subjected to the tax in the original transaction.
  • Records of collection activities and the determination of uncollectibility.

Although this seems like a long list, every business should have this information on hand – and if they don’t, you can help them have it ready in case it’s needed for this scenario or other related matters.

Even though states that collect sales tax vary on process and claiming details, they all provide some sort of bad debt sales tax relief. Keep this possibility in mind as your retailing clients make the annual, but necessary, shift of some receivables from the “we might see our money someday” category to the “we’ll never see our money” category.

2. Special incentive refunds for sales taxpayers. Many states provide special sales tax refund schemes for particular purchases. These incentives take many forms, but they often follow a similar model: Purchases that represent investments in a state can result in refunds of sales or use taxes paid in pursuit of those investments.

Of course, most of these types of incentives require proof of intent that can only be obtained over the passage of time.

Examples include investments in infrastructure, manufacturing or research and design facilities, data center construction, and even passenger air carriers. No need to bore you with an extensive list, but suffice to say there are as many sales tax refund opportunities available as there are elves in the North Pole – ranging from obvious to the really, really obscure. If you are interested in adding this value to your consultations with your business clients, be prepared in most cases to ferret these details out.

One last little detail: Always remember that a state will never refund any money to you or your clients unless the vendor that “collected” the tax actually remitted the tax to the state. Cheaters never win, but if your company or client’s company paid tax that was never sent to the state, they lose, too – although the state will really appreciate the refund application information and will likely pay your nonremitting vendor a little visit.

Three Factors to Keep in Mind
While you’re working with clients to figure out whether they qualify for a sales tax refund, try to keep the following in mind:

1. Statute of limitations. As is the case with all periodic tax obligations, states won’t allow vendors to make any claim on any period that falls outside of statutory time limitations.

One of the most important values to a company that may be due a sales tax refund is awareness of the time restrictions on claiming. Roughly speaking, states are not terribly generous with their time frames, so regular analysis of potential refund opportunities is critical. On the other hand, some special sales tax refund incentives provide for time periods beyond the typical audit/assessment/appeal time frame.

2. Proper form. Like so many other topics in state and local tax, form can often trump veracity. Follow given instructions to the letter, and make sure the information you provide is neither lacking nor excessive – and get it in on the right form at the right time!

3. Documentation. Documentation. Documentation. Need I say more?

It’s probably a long shot for many clients and companies, but given the right circumstances and an amount worth the effort, a sales tax refund can be a useful tool to boost your clients’ bottom lines and perhaps provide a new flavor of engagement to help your end-of-year earnings, too. After all, no one wants a lump of coal in their stocking.

Have a great holiday and new year!

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