3 Sales and Use Tax Exemptions You May Have Missed

November 6, 2014

It’s nearly impossible to keep up with ever-changing sales and use tax laws. If your company’s sales and use tax procedures are out of date or misaligned with the tax requirements of the states in which you do business, you may be overpaying or placing your business at risk of a state audit.

Some of the exemptions we commonly see companies missing include:

  • Sales tax exemption for containers and other packaging and shipping materials. Are you currently paying sales tax when you purchase labels, containers, boxes, bags or other packaging materials used to ship your merchandise to customers? If so, you may be overpaying your sales tax. Common examples include cans in which canned goods, paint or medicine are delivered to customers; bags purchased by any retail store, bakery or grocery store; shipping labels with “Fragile” or “Handle with Care” that are attached to boxes of merchandise delivered to your customers; and barrels or bottles used to deliver beverages to customers.
  • Manufacturing exemptions. There are a wide range of sales tax exemptions available to manufacturers, including exemptions for manufacturing machinery, ingredients and component parts, the containers mentioned above, and electricity and fuel used within the manufacturing process. Other industries that may also have components of manufacturing within their business and may qualify for these exemptions. For example, grocers’ bakery and/or meat departments may qualify as manufacturers for sales tax purposes.
  • Direct mail. Effective July 1, 2013, the sales of printing services that result in advertising and promotional direct mail are exempt from sales tax, as are the sale or purchase of the direct mailings. E-blasts, however, are taxable. 

Potential items for exposure

On the other hand, there may be items that you did not pay sales tax on and should have. Common audit adjustments include purchases made by credit card (especially from out of state vendors), the purchase of fixed assets that do not qualify for an exemption and software renewals/maintenance agreements. These are just a few items that may be throwing up a red flag for a potential sales and use tax audit.

Are you confident in your company’s current sales and use tax procedures? To determine your company’s exposure to an audit or if you are overpaying, contact a SALT member and have a reverse audit conducted. A sales and use tax reverse audit will highlight the accuracy and reliability of your company’s sales/use tax compliance function. This evaluation may highlight exposure areas and allow for corrective measures now to mitigate a potential future assessment. Moreover, a sales and use tax reverse audit may produce refund claims for your company.

Please contact your Schenck advisor, or call any member of the State & Local Tax team  at 800-236-2246 to schedule your reverse audit.