Know When to Challenge Sales Tax Law for a Refund

The laws governing sales and use tax are complicated.

They vary by state, and their interpretation can be controversial. When is arguing the finer points likely to benefit you financially?

Even the best CFO’s struggle with sales and use tax because it is a minor focus area.  Financial officers should spend their time on more critical initiatives.

However, the opportunity to reduce the cash flow finding its way into state coffers is a real one – the challenge is in knowing when to push and where to dedicate the effort.

The Jurisdiction Puzzle

First, it’s important to understand that the seller’s location drives sales tax, and they may have a physical presence in multiple states.

Even where the seller does not charge sales tax on an item, you become responsible for paying use tax instead – unless it is exempt.

Here’s an example: If you buy a phone from a New York vendor and will use it in New York, you’ll be charged sales tax.  If you buy the same phone from a company in Florida and they ship it to you in New York, they won’t charge you either Florida or New York sales tax.

But, you will remain responsible for paying the tax.

Companies must keep track of such out-of-state purchases, fill out a schedule and file a use tax return. It’s time-consuming and confusing, and mistakes happen easily.

Even when the tax rules are clear, taxability can be confusing

The heart of the confusion lies in all of the gray areas that exist in interpreting sales and use tax law.  Take the example of medical devices in Pennsylvania.

In Pennsylvania, medical devices are tax-exempt if used for therapeutic purposes, but taxable when employed for diagnoses.

If a hospital group is using specific equipment exclusively for therapy, then they’re entitled to a refund on any sales tax they were originally charged.

The fun starts with equipment that serves both therapeutic and diagnostic needs.

In Pennsylvania, if something is used for therapy at least 51 percent of the time, it is exempt. In Illinois, the magic number is 40 percent.  And you need to work through this for each piece of equipment.

Or take the situation where a healthcare practice buys 10 of the same medical device.  The buyer may not know the exact use upfront, but they pay sales tax on all everything.  Some of it is almost certainly tax exempt, but sorting this out and documenting is significant work. Most organizations don’t have the resources to sift through years of records in order to establish their right to a refund.

Cases like these are straightforward, and it is always worth going through how purchases were classified and correcting the classifications based on real use.

States expect reclassifications and the process is simple.  It is just a lot of work. 

Then there is the case where the rule itself is vague. Vaguery is an opportunity to challenge.

One of our clients installed a stadium scoreboard.  Installation cost millions, and the team paid a hefty sales tax bill invoiced by the construction company.

But once installed, the scoreboard also advertised a local business.  The advertisement placed the scoreboard firmly in a gray area.

We argued the purchase classified as “outdoor advertising,” the state agreed and issued a refund.

The state doesn’t always agree so easily.

The state may have come back with a partial refund or a different interpretation, and we would have had to decide how to proceed and how far to push.

Often the states will offer to settle for a percentage of what is due.  They do this to avoid setting a precedent and sometimes negotiation is the best solution.

Sometimes though, the best solution is to keep arguing, the difference is knowing how strong your claim is.

Getting Tax Relief Requires Experience and Knowledge

The key is deep knowledge of how each state approaches sales and use tax to pull together a tax relief strategy.

Then it takes time and elbow grease to work through the details of the refund application and argue the points to argue.

Sometimes you take the partial refund and sometimes you keep going.

It all depends…

Who can afford to have in-house staff bogged down by this process?  Better to rely on outside sales and use tax professionals who live and breathe the details.

That is what we do.  We study sales tax and use tax continuously.  It is all we do.  We know where to push and where to search to find money you didn’t know is yours.

Interested in what we can do for you?  Let’s talk. 

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