As we have covered in other articles, the best way for most companies to manage sales tax and use tax is to develop a rules-based system, then bring in specialists every three years to recover overpayment and tune the rules.
One way to tune the rules is to apply for exemptions.
For example, many states don’t charge sales tax for items if a government program pays for their use. Hospitals buying supplies for procedures covered Medicaid and Medicare are prime examples.
Often determining at the time of purchase whether an item will later end up in a procedure covered by Medicaid or Medicare is impossible.
However, there is a way to apply for a partial exemption upfront, based on past purchases. This can be a very useful cash flow tool, one that is not limited to hospitals and medical supplies.
Pay less today
Here is the problem: say that a hospital buys medical supplies, such as bandages and splints, for future use. They pay sales tax on the entire order, then place it into inventory.
Some of the patients they treat using those materials will have their medical bills paid by Medicare or Medicaid, while others will not.
Recovering excess tax payments requires that the hospital conduct a detailed analysis to see which sales were tax-free and apply for a refund.
The hospital is always paying the money first then recovering it later, which is a drain on cash flow in the best of cases. The audit is also time-consuming, and often they don’t do it and end up forfeiting the overpaid tax altogether.
However, there are also opportunities to apply for exemptions up front, put this into the rule-based system and keep the cash in-house.
When we filed for a refund for one of our clients, we determined that 43% of their purchases were eligible for a refund during a 12-month period. The state agreed, and we got the money back.
Then we took that same ratio and applied for an exemption against future purchases. Again, the state complied, and our client was able to avoid paying tax on 43% of their purchases going forward.
Another option: Buy Wholesale to Stay Ahead of the Curve
There’s another workaround in some states that protects buyers from playing perpetual catch-up.
Wholesale purchases are exempt from sales tax.
All you have to do here is complete a resale certificate for any goods that you will, at some point, sell to someone else.
Often companies overlook applying for this exemption leading to inappropriate sales and use tax obligations on wholesale purchases.
Refunds today exemptions tomorrow
A good sales and use tax specialist should be able to help you today and for the future. We can first help claw back the money you have overpaid. To minimize burdens in the future, we also apply for exemptions to avoid overpayment in the future.
At FMCC, this is all we do and we would be happy to help you figure out how to keep more of your money.