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Reverse sales and use tax audits can reveal refund opportunities for manufacturers

While most states offer sales and use tax exemptions for certain purchases by manufacturers, the details can vary from state to state. Manufacturers often overlook exemptions to which they’re entitled, leading to tax overpayments. Consider conducting a reverse sales and use tax audit to ensure you’re taking full advantage of manufacturing exemptions.

What’s a reverse audit?

These audits are the opposite of government audits that seek to collect underpayments of tax. In a reverse audit, the goal is to identify and recover overpayments of tax.

Generally, equipment and raw materials used in the manufacturing process are exempt from sales and use tax. However, many states have expanded their exemptions to include purchases of other items used or consumed in the manufacturing process. Examples include electricity, fuel, water, coolants, solvents, lubricants and adhesives.

Others exempt equipment that is not used directly in the manufacturing process but is essential to it. Examples include computers, lighting, plumbing and electrical, and climate control equipment. Maintenance-related purchases, such as repair parts, maintenance equipment, and maintenance supplies, may also be exempt.

Other items that may be exempt from sales and use taxes include:

  • Packaging materials
  • Material handling and storage equipment used in the manufacturing process
  • Safety equipment and uniforms
  • Fire detection and suppression systems
  • Cleaning equipment and supplies used on or near manufacturing equipment
  • Pollution control equipment

Beware: Sales and use tax exemptions may change over time, making compliance challenging. Stay updated on the latest rules that apply in the states in which you do business and purchase equipment and materials.

Are you missing out?

Typically, manufacturing exemptions aren’t automatic; to claim them, you must present the supplier with an exemption certificate. A reverse audit can help you ensure you’re making the most of available exemptions and not leaving money on the table. Contact us to start the audit process and recoup any sales and use tax overpayments.

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