Written by: James Edington
Manufacturing facilities that have recently undergone construction or expansion often have opportunities to reclaim funds due to sales and use tax exemptions that were erroneously overlooked or improperly applied. When contractors inadvertently pay tax on materials consumed within a construction project or apply sales tax to transactions that should be exempt, manufacturing businesses can take proactive steps to rectify the situation and recover the overpaid tax amounts.
UNDERSTANDING SALES & USE TAX EXEMPTIONS FOR MANUFACTURERS
Sales and use tax exemptions are provisions that allow certain transactions or entities to be excluded from the tax base, providing financial relief to specific industries or activities. Manufacturing facilities often qualify for exemptions on transactions related to machinery, equipment, and support facilities incorporated into the structure that facilitates the production process. These exemptions are designed to promote economic growth, encourage investment, and ensure a level playing field for businesses.
THE IMPORTANCE OF COMPLIANCE AND EDUCATION
Prevention is key to avoiding future tax errors and optimizing your manufacturing facility’s financial health. To minimize the risk of sales tax errors, consider the following best practices:
- Educate Contractors: Provide clear guidance to contractors on the applicable exemptions and requirements for the manufacturing industry. A well-informed contractor is more likely to accurately apply the correct tax treatment.
- Internal Training: Educate your internal staff about sales and use tax exemptions, sales tax regulations, and proper documentation practices. This will help prevent future errors and ensure compliance.
- Regular Audits: Conduct periodic reviews of your transactions and documentation to identify any potential errors or discrepancies. Early detection can prevent overpayments and streamline the recovery process.
As an extension of your tax department, DMA can assist in all aspects of training, education, and regular audits.
RECTIFYING SALES TAX ERRORS: HOW DMA CAN HELP
When contractors inadvertently pay tax on materials consumed within a construction project or mistakenly apply sales tax to transactions that should be exempt, DMA can help manufacturing facilities recover overpaid tax amounts. Our team will:
REVIEW THE TRANSACTION
Our team will thoroughly assess invoices and progress payments to contractors, including schedule of values support, to determine where sales and use tax was applied in error.
Our team of experts will collect all relevant documentation, including purchase orders, invoices, and receipts, to substantiate the exempt nature of the transactions.
COMMUNICATE WITH CONTRACTORS
We will work closely with the contractors who applied sales tax incorrectly to discuss the situation, provide them with the necessary documentation, and explain the applicable exemptions. Our team takes great care to maintain the integrity of the relationship between our clients and their contractors.
FILE FOR REFUND
DMA will prepare and submit the required forms and documentation to the contractor and, ultimately, the appropriate tax authority—all on your behalf. Otherwise, if the contractor is willing to adjust the tax overpayment via a change order to an open contract, we work with the contractor to ensure the benefit is realized in a seamless manner.
MONITOR THE PROCESS
Our team stays engaged in the recovery process by monitoring the status of your refund claim, providing additional information, or addressing any inquiries from the contractor and tax authorities.
Recovering overpaid taxes resulting from incorrectly applied sales tax is a proactive step that manufacturers can take to optimize their financial position. DMA can successfully navigate the recovery process and reclaim funds rightfully owed to our clients. Additionally, we assist your team in implementing effective compliance measures and promoting education within your organization to help prevent future tax errors and contribute to your company’s long-term financial success.