CLIENT
Our client is a multinational manufacturer with a significant US presence, operating across multiple states and managing extensive software purchases to support its workforce and operations.
CHALLENGE
Our client faced complex sales and use tax challenges related to software purchases. Its corporate headquarters is in a state that taxes all electronically delivered software, meaning vendors automatically charge sales tax on all software purchases at the headquarters location. However, the company’s software was used across multiple states, including jurisdictions where software is exempt or taxed differently based on usage (e.g., manufacturing, R&D, administration, etc.).
Key challenges included:
- Apportionment Complexity: Software licenses covered thousands of employees in different states, requiring accurate allocation of tax liability
- Vendor Default Taxation: Vendors charged sales tax at the billing location, leading to potential overpayments where software should have been tax-exempt or taxed at a lower rate
- Lack of Internal Visibility: The company lacked a systematic way to determine where software was used, and which purchases should be apportioned for tax savings
- Compliance Risk: Without a proper apportionment strategy, the company faced ongoing compliance risks and audit exposure
Solution
As part of a large tax review and recovery project, DMA conducted a comprehensive software tax review, identifying overpayments and optimizing the company’s tax processes. Our approach included:
Software Apportionment & Tax Analysis
- Evaluated software purchases, user locations, and state-specific taxability rules to determine proper apportionment
- Worked with IT and finance teams to create a user-based tax allocation strategy
- Assessed state-by-state exemptions and tax treatment to ensure compliance
Sales Tax Recovery & Refund Claims
- Filed refund claims with the state tax authorities to recover overpayments
- Provided detailed documentation to substantiate apportionment claims
- Assisted in vendor communications and exemption certificates to adjust future tax charges based on accurate software usage
Ongoing Compliance & Process Optimization
- Established procedures for tracking software purchases and user locations to prevent future overpayments
- Helped the company implement self-accrual practices to manage tax obligations correctly
Result
As a result of our collaborative efforts with the client’s teams, DMA recovered over $5 million in sales tax refunds from overpayments across multiple years of filings. Our experts recommended a software tax apportionment framework for future processes, ensuring proactive and proper tax allocation. Additionally, our team reduced the client’s compliance risk by aligning tax treatment with state-specific rules, and strengthened financial controls, which eliminated unnecessary tax burdens while freeing up resources for strategic initiatives.
Why DMA
DMA’s deep expertise in sales and use tax recovery, software apportionment, and multi-state tax compliance allows us to deliver impactful solutions for companies facing complex tax challenges. Our ability to navigate state-specific tax laws, leverage automation, and optimize tax strategies ensures our clients recover overpaid taxes and maintain compliance efficiently.
For companies with multi-state operations and significant software expenditures, DMA provides the knowledge, tools, and strategies to minimize tax liabilities and maximize savings.
Leverage TaxARC™ for Software Apportionment
DMA’s TaxARC™ solution includes Multiple Location Allocation, a powerful feature that simplifies software tax apportionment and allows users to allocate a single transaction across multiple jurisdictions based on percentage or amount, ensuring proper tax rates are applied. When software is purchased at one location but used across multiple states, TaxARC™ enables seamless allocation—reducing compliance risk and improving tax accuracy.
Allocation can be applied manually or automatically through processing rules that allocate tax based on pre-set criteria, such as headcount or usage type. These allocations are seamlessly reflected in month-end adjustment reports, ensuring companies maintain accurate tax reporting across multiple jurisdictions and have control over their tax obligations.