Businesses Frequently Overpay Sales and Use Taxes
With states and localities increasingly looking to collect taxes from people and businesses that buy goods and services online, many taxpayers may not be aware that they could be overpaying sales and use taxes.
In a recent report, McGladrey LLP has identified 10 industries that frequently overpay sales and use taxes: manufacturing, engineering/research and development, biotechnology, printing/publishing, technology, telecommunications, financial services, insurance, health care and pharmaceuticals.
State and local tax authorities may try to establish there is nexus under the Supreme Court’s 1992 Quill decision, which required a physical presence for them to be taxed, even when the actual presence isn’t clear.
“From a nexus perspective, we’re watching states try to erode the Quill bright line test,” said Steve Riddle, a principal in State & Local Tax at McGladrey LLP. “They’re trying to expand their reach, testing the waters and trying to test Quill. States are looking to increase their dollars and their coffers. They need revenue for infrastructure, for schools, for everything. For many of our clients in the middle-market space, what we like to do is educate them on where you may have nexus from a sales and use tax perspective, or from an income tax perspective, because those are changing as well from an income tax perspective.”
McGladrey has found that some clients may be filing in jurisdictions where they should not be filing, while others should be filing in places where they are not filing and therefore may be subject to penalties and interest.
“Some states have the ability to set sales taxes on businesses that have not registered or filed sales taxes or use taxes, and they can go back to the beginning of the time when the company did business or that they established a physical presence in that state,” said Riddle. “These can be significant dollars. The ability for these companies to go back to their customers may not be feasible. Either the customer has gone out of business or they are concerned about damaging the relationship. This can easily be 8 or 9 percent negative impact on somebody’s bottom line.”
Manufacturing, technology, telecommunications, printing, publishing, biotech, engineering, R&D, and health care are among the industries where there may be an exemption.
“There are 7,200 taxing jurisdictions, and if you’re a telecom company you could be filing 4,000 tax returns, down to the school district level,” said Riddle. “It’s just difficult for anybody to keep up with all of the changing regulations and all of the bills that are being put forth.” Read more on Accounting Today.