The value of a sales or use tax exemption

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.

Let’s start your refund today. 

Why Sales and Use Taxes Are Impossible To Manage

Sales and use tax laws are vague, ambiguous and uncertain; they are not consistently applied or implemented. 

The complexity begins with the concept of sales tax and the fact that, not all states even collect it. Forty-seven states do collect sales tax, while three have no sales tax at all.

But then there are the municipalities with their tax regimes.

The nested complexity of sales tax is a real pain for companies selling across state lines.  But this is not really what creates the complexity. Sales taxes are a moving target; they shift with politics, revenue needs, and business incentives.

And, to add an extra layer of complexity, not all of these changes are codified in the law.  Often, the regulations exist in the precedent set by the courts and are kept quiet to avoid a run on the state coffers.

Sales taxes tend to have a double purpose

They begin life as revenue generators, but often have multiple exemptions carved out for businesses that the states want to attract (or at least, companies that state lobbyists have succeeded in getting their local governments to favor).

For example, Pennsylvania has a sales tax, but manufacturing companies don’t have to pay it on the goods and services they purchase to produce what they make.  They do have to pay it on goods they consume for themselves.

Often this line can be gray and confusing.

The state also offers generous exemptions for healthcare companies such as for-profit hospitals and surgical centers.

However, not all healthcare purchases are treated the same way. PA does not tax therapeutic devices but does tax diagnostic devices. 

Deciding whether a piece of equipment is therapeutic or diagnostic can be challenging. It seems straightforward enough, but what if the equipment is both?  What if sometimes it falls into one category and sometimes in another?

In Pennsylvania, therapy must constitute at least 51% of its use to be exempt.

In Illinois, the magic number is 40%.

You must work through this for each piece of equipment.

The fact is that often the differences are not clearly captured or well described in law – these definitions are often up for debate.  And part of knowing how much you need to pay is understanding how the winds of the discussion are blowing.

The result is a Byzantine thicket of differing taxes across the country. For companies operating in multiple states, sales and use taxes can become next to impossible to sort through especially if your company takes advantage of the cost benefits of centralized purchasing.

Companies end up paying too much – but can get it back.

The result of all of this is that companies tend to pay too much sales and use tax because the most financially viable solution for any given invoice is just to pay the tax.

As far as anybody knows it must be paid anyway and paying a little bit of tax now avoids an audit later.

And it is true that managing these taxes can be prohibitively expensive.

This is where an expert can help.  Sales and use tax are all we do.  We know the exceptions, the opportunities and how courts are ruling on the gray areas.

Assessing every invoice can be prohibitively expensive, but you generally have three years to claim your money back from the state.  So, a refund review once every three years can cut through the complexity, recover your money and allow you to reinvest in your business.

This is what we at FMCC do.  The process, simple pain-free, can yield a nice cash windfall that you weren’t counting on.  Read more about what we do here.

And spend your money and management effort on growing your business, rather than managing sales tax.