As the COVID-19 pandemic continues and states start reinstating restrictions, many businesses are in a constant state of flux. Certain industries have been dealt a brutal financial blow resulting from this extraordinary situation. As we have previously reported in the COVID-19 State and Local Tax – Sales and Use Tax Guidance chart, many states have provided relief options for companies as it relates income, sales and use and business tax through reporting extensions, payment deferrals and elimination of mandated prepayments. However, companies are still on the hook for remitting their tax liabilities, no matter the available extensions. Are there are other areas that companies can explore for additional opportunities to reduce their tax liabilities?
An overlooked area of potential savings relates to exemptions for sales and use tax. Companies should investigate all qualified exemptions pertaining to their specific industry. For instance, many companies are paying taxes on certain purchases that would ultimately be exempt just because they are unaware. These inaccuracies may also be due to outdated system taxability settings, inexperienced personnel and inaccessibility to the latest tax updates. Another area for potential savings is the multiple points of use (MPU) exemption allowing the purchaser of certain services (cloud-based network, storage, etc.) used across various jurisdictions to reasonably allocate use tax by applying the tax rate for that specific jurisdiction. This can lead to possibly paying a lower tax rate based on the usage jurisdiction instead of the address on the service contract.
Common Examples of Exemptions:
- Buyers purchasing items to resell to its customers
- Manufacturers buying parts for larger machinery and equipment
- Shipping supplies and postage, and certain shipping charges1
Not Commonly Known Examples of Areas of Savings:
- Occasional sale exemption
- Utilities: opportunity to remove from the tax base utilities used in manufacturing, R&D or other activity deemed exempt
- MPU: allocation of taxable vs. non-taxable usage
- Reciprocal credits: credit for taxes paid in another state
- Procurement company tax structure: centralize procurement, manage tax reporting, cash flow opportunity
Duff & Phelps' Sales and Use Tax specialists recommend taking an inventory of your company’s larger expenses to determine if the tax can be mitigated. Companies can do this by researching state specific tax statutes and regulations for various exemptions, but this option can be time consuming on company personnel. Another option would be to consult with a tax professional to review these items and provide your company with a tax determination matrix. Make sure the consultants provide the explanations and regulations to support their findings should the company need to defend itself against an audit.
Once the tax determination has been completed, the next step would be to figure out if an exemption certificate is required to be provided to the seller/vendor. Every state has distinct guidelines relating to qualified exemption certificates. Companies should be aware of the renewal periods and verify the certificate for completeness. This also holds true if your company is on the receiving end of an exemption certificate. Auditors will disqualify exemptions if the certificate is incomplete or the buyer information does not match the invoice.
In recent months, we have seen a number of companies look further into increasing their savings by taking steps to establish a centralized procurement company in a favorable jurisdiction that provides state and/or local incentives based on the amount of spend incurred during a certain period of time. Apart from the incentives, the main benefits to establishing a procurement company are to simplify the purchasing process, increase the control of sales tax decisions and avoid potential double taxation.
During this time, all companies should be creatively thinking about ways to reduce their sales/use tax liability, and tax exemptions is only one area that could provide such a savings. If you have any questions regarding your specific tax situation, do not hesitate to reach out to one of Duff & Phelps experienced tax professionals for guidance during this volatile time. We encourage all companies that need assistance to contact us. Additional information about our team and sales tax services offered can be found here.
1.Chart provided by Checkpoint 2020