Our client is a North American food manufacturer with numerous iconic brands and revenue of over $11 billion per year.
The state of Illinois—where the company has its headquarters, manufacturing locations, and a data center—has unique and sometimes complex tax exemptions that apply to the company:
- The state has a challenging software environment. Software is taxable, but software licenses and associated software services are not taxable if they are cloud-based or meet a 5-pronged test. Tax engines are not able to determine whether software meets the 5-prong requirements. Additionally, the city of Chicago has its own tax administered separately from the state and has different rules regarding software.
- Illinois expanded the state’s manufacturing sales and use tax exemption to include production-related tangible personal property, effective July 1, 2019. The state also expanded the definition of production-related tangible personal property to include supplies and consumables used in a manufacturing facility, including fuels, coolants, solvents, oils, lubricants, adhesives, hand tools, protective apparel, and fire and safety equipment used or consumed within a manufacturing facility.
The client recognized that it had incorrect mapping decisions in its tax engine for software support services from SAP and other business software, resulting in large accruals and overpayments of Illinois sales and use tax. Additionally, because the expanded manufacturing sales and use tax exemption included production-related tangible personal property, the company had additional recovery potential.
The company partnered with DMA to perform an Illinois sales and use tax review for calendar years 2019 to 2021. The DMA team took the following approach:
- Reconciled use tax data to IL ST-1 returns to ensure tax was paid on the invoices and data being reviewed
- Performed a detailed analysis of the company’s purchases of software products and associated documentation, contracts, and agreements
- Reviewed software invoices to see if tax was paid when it should have been exempt; if tax was incorrectly applied, provided the reason and relevant statute to support the refund position
- Analyzed all invoices subject to the expanded sales and use tax exemption from the effective date forward
Because the DMA transaction tax team has significant experience with sales and use tax reviews and recoveries in the state of Illinois, our experts were aware of all statute changes, understood how to apply all applicable exemptions, knew what auditors required when filing claims, and were able to efficiently handle a high volume of purchases.
Our review and recovery engagement yielded the following:
- While conducting the underpayment review, our team found very little exposure or liability where no Illinois tax was paid. This standard practice for DMA’s review service provided a complete picture of our client’s tax position in the state (both overpayments and liabilities). We presented both overpayment and underpayment findings before obtaining approval to pursue refunds.
- Ultimately, our experts identified and obtained nearly $3.5 million in Illinois use tax credits and $450,000 in sales tax refunds supported by state statutes and regulations.
- On behalf of our client, the DMA team filed over 60 IL ST1-X amended returns (for use tax refunds). DMA then worked with the Illinois Department of Revenue (IL DOR), which audited the claim only and ultimately approved the refund.
- For purchases with sales tax overpayments, the team filed 20 vendor claims and managed the process for obtaining refunds directly from the vendor (the standard Illinois practice). DMA also set up the exemption certificates with the vendors to have Illinois purchases taxed correctly in the future.
- While filing the refunds, the DMA team provided a matrix and assisted our client with Vertex mapping changes to correct its use tax accruals for significant material groups and cost centers.
DMA has long-standing relationships with our clients. We understand their businesses as well as the local tax environments in which they reside. With offices across the US, we stay connected with local and state statutory changes that can benefit our clients, and have a trusted reputation with local auditors. Our expertise allows us to work independently without the need to rely heavily on our clients’ resources.
OUR TAX RECOVERY MEANS YOUR CASH RECOVERY
Rely on DMA’s sales and use tax experts, who have specialized state and local expertise – and strong relationships within jurisdictions – to ensure your company is effectively minimizing its tax obligation.