If a company suspects that their sales or use taxes have been overpaid, this problem needs to be addressed immediately. A money leak can quickly create a major hole in a company’s bottom line.
Recovering from overpayments, as with every issue regarding sales and use tax, depends on the state and the type of tax. Let’s break down the different scenarios companies face.
How to Claim a Refund for Sales Tax Paid Directly to a Vendor?
Supplier Sales Tax Refunds
In most states, if tax is overpaid on purchases that qualify for exemption (e.g., manufacturing machinery, production supplies, resale items, etc.), a company must provide the supplier with a list of exempt purchases, accompanied by explanations for the exemptions and copies of the transactions’ exemption certificates.
Next, the supplier should issue a refund of the previously collected and remitted sales tax, while adjusting their sales tax account to recover the credit issued on their next sales tax return. All this work is done behind the scenes before Department of Revenue (DOR) involvement. This transaction between a company and supplier can be quickly resolved.
DOR-Ordered Supplier Sales Tax Refund
Another possible scenario is that the supplier requests a refund directly from the DOR with the reason “sales tax refund issued to customer.” This refund claim is reviewed and processed by the DOR and then, your supplier will issue a refund to the company. In many states, interest is paid on these refund claims.
DOR Sales Tax Refund
In this common scenario, the supplier requests that your company seeks the refund directly from the DOR. Depending on the state, this may be the only option to receive the refund. However, other states do not have this as an option at all and instead, claim that only the taxpayer who remitted the sales tax can seek the refund.
With this third scenario, an Assignment of Vendor’s Rights form is required to prevent two parties (the customer and the supplier) from seeking refunds on the same transactions. This form needs to be signed by the supplier, so if the supplier is out of business, the company may be out of luck. The refund is reviewed and processed by the DOR and a check will be issued directly to the company, or perhaps jointly to both parties.
How to Recover Overpaid Use Tax?
If use tax has been paid in error, a company has three options:
- Correct the error within your own use tax account and handle it within your own accounting records. This may be the easiest option if the overpayment is limited to a handful of transactions. Good documentation should be created in the event of an audit. A company must substantiate the adjustments that were taken to the use tax account.
- File an amended return. This option often can be completed online, and a refund or credit will be issued to your account.
- File a refund claim. This is often the best-case scenario when a significant number of transactions are involved, or the company wants an issue reviewed and approved by the DOR audit department. Depending on the size of the refund, it may be desk-audited or auditor-reviewed in the field (i.e., at your location). Questions may be asked about the specific exemption claimed to ensure the validity of the refunds. Typically, most states pay interest on refunds.
What to Consider Before Filing for a Tax Refund Claim
All of these processes seem straightforward but should be taken with a note of caution. Any time a company files for a tax refund claim, the possibility of triggering a sales and use tax audit exists. For some companies, that is no big deal – they are audited yearly like clockwork. If a company has not been audited in a while, or is aware of potential exposure, consider the pros and the cons before filing for tax refunds.
Best Practices When Evaluating Overpaid Sales and Use Tax
When a company discovers they have overpaid, investigate the reasons why:
- Was the supplier not given a valid exemption certificate?
- Was staff untrained on the taxability of the products that they purchase?
- Were there tax law changes to trigger this refund opportunity?
After determining the “why,” educate purchasers, accounts payable staff and plant managers on how to avoid future overpayments.
