When we review use and sales taxes to find refunds we come across two different opportunities.
The first is purchases that are a black and white mistake. At some point along the chain, an item is classified as “taxable.” Our client pays the sales or use tax but doesn’t owe anything; this payment is a misclassification.
The second opportunity is more complex and derives from an understanding of the interpretation of the law, which is not nearly as black and white. The key is to understand how the interpretation has changed over time apply for a refund based on the change.
This isn’t as straightforward as a misclassification but is very common and can be a significant opportunity.
Tax misclassifications and why they happen
Sales tax misclassifications occur all the time. There are a million reasons why but generally they come back to the complexity of managing sales and use tax and trusting that their vendors have it figured out. Companies either need to have a team dedicated to checking every purchase or use tax rules.
A dedicated team is expensive, so rules are the norm and these rules often lead to misclassifications.
Reviewing for misclassification is straightforward: we go through your purchases and check how they were classified. We put purchases in the right category and can generally find tens to hundreds of thousands of dollars of refund money.
Arguing for a gray area
Sometimes, however, the opportunity is not due to a misclassification so much as a misinterpretation. Something might fit into multiple categories and arguing one over another makes the difference between taxable and not taxable.
Take the example of a scoreboard.
One of our clients was a professional sports franchise that built a 10-million-dollar scoreboard.
This scoreboard is fixed to the building. It is wired in; it is real property. All of this means that it is taxable, and the team owed hundreds of thousands of dollars in tax.
Here is the catch: In their state, while real property improvements are taxable, outdoor advertising infrastructure is not taxable.
And this scoreboard has a WB Mason advertisement on it.
In the team’s original interpretation, the ad was secondary, so they paid the tax. But we knew that the state took a broad view of outdoor advertising, so we made the case. The state looked at it, saw the ad and agreed.
The team got their money back.
Sometimes this is not clear-cut. The state could have come back and decided this wasn’t advertising or agreed that they didn’t know. But even here, there is an opportunity for a refund.
The state is often concerned about setting legal precedent. If the scoreboard case were to make it to court, the court might find that all scoreboards are ads. Such a finding could lead to a flood of refund applications and a need to pay huge refunds.
The state often wants to avoid this, so even when there is a gray area that favors the state they often settle and pay the refund rather risk a lawsuit that changes the law.
So why didn’t my tax guys pick this up?
In the case above, the baseball team came back to us and said, “Why didn’t our accountants pick this up?”
The fact is that the nuances of sales and use tax aren’t their job. Accountants and tax professionals mainly focus on income tax. They make sure your books add up, and they aren’t focused on sales and use tax.
And they often don’t have the expertise to do so.
Knowing when to argue and when to move on takes a lot of specialized knowledge and numerous trials and errors. Some firms have this and are happy to roll up their sleeves, dig and perform a comprehensive review. But that is the exception.
It also requires a different filter. The construction company did not know about the difference in tax, the team didn’t know about the difference, and everybody generally agreed that the scoreboard was a capital improvement.
Only when we considered the scoreboard through the filter of sales tax did we see it as advertising.
And that is the value of bringing in the experts to review both misclassifications and those gray areas.
It can be worth millions.