How Manufacturers and Distributors Can Benefit from Sales and Use Tax Audits

Sales and use taxes can be complex and costly for manufacturers and distributors, and many organizations unknowingly overpay them. 

A sales and use tax audit, also known as a reverse sales tax audit, can help you recover these overpayments and implement strategies to prevent future losses. Benefits of a sales and use tax audit include: 

• Recover substantial refunds and credits.
• Identify and correct tax errors to avoid penalties and improve tax processes for future accuracy.
• Reduce tax expenses.
• Protect your business from potential audits and penalties. 

How Sales and Use Tax Audits Work 

A sales tax refund review, also known as a reverse sales tax audit, analyzes your past tax filings to identify potential overpayments. Vendor invoices, use tax returns, and other relevant documentation are meticulously examined to identify areas where you may have been incorrectly charged or overpaid sales taxes. 

It is essential to review both internal processes and those with vendors to make sure that the tax is handled correctly moving forward. 

Most organizations are concerned that a sales and use tax audit will be intrusive and prevent them from completing their regular responsibilities; a consultant can complete this work independently, so the process is painless for you. 

Many are also concerned that this might lead to an audit. If we discover sales tax exposure, we will give you options on how to remedy the situation. 

Example Sales and Use Tax Audit Process 

One to three days spent onsite reviewing your documentation and identifying potential refund opportunities. Within a few weeks, findings are shared, and, with the organization's approval, refund claims are filed with the appropriate state or taxing authority. If appeals are needed, the entire process typically takes six to eight months. 

Common Sales and Use Tax Overpayment Areas 

Sales tax regulations can be intricate. Some common mistakes that can lead to sales tax overpayments include: 

• • Vendor errors: Vendors may mistakenly charge tax on exempt items or miscalculate the tax rate.
  • Buyer errors: Buyers may misinterpret tax codes or assume vendors charged the correct tax, which can lead to overpayment.
  • Software glitches: Inconsistencies or errors in accounting software can result in incorrect tax calculations.
  • Internal control breakdowns: Miscommunication or mistakes within your organization can lead to missed exemptions or duplicate payments. 

How Often Should You Conduct a Sales and Use Tax Audit? 

The complexities of sales tax laws and the ever-changing business landscape make regular reviews essential. We recommend conducting a sales tax refund review every two to three years, especially for companies with an annual review exceeding $50 million. 

If things are good, you will receive a free checkup. This should be viewed as a standard and acceptable business practice, just like anything companies do to protect themselves. 

By proactively identifying and claiming refunds, you can improve your organization's bottom line.

Do you need help with your organization’s sales and use tax audit? Contact EisnerAmper to discuss how we can help.