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State Tax Issues Associated With Troubled Companies: Part Two- Sales and Use Taxes



State Tax Issues Associated With Troubled Companies: Part Two- Sales and Use Taxes

Sales taxes are often overlooked when a company is experiencing an economic crisis.  Given that some jurisdictions can have rates over 10%, this can be very costly at a time when a company can least afford this expense.  With the exception of bankruptcy situations, there are no “special” rules with regard to sales or use taxes when a company is experiencing financial difficulties.  So, how can a troubled company minimize their sales and use tax obligations?

The following highlights several areas that should be reviewed for possible opportunities.

  1. Bad debts – many companies are in similar situations these days and are having trouble paying vendors.  Depending on the state rules associated with bad debt deductions, this may be an area of opportunity.
  2. Large purchases – large single purchases or recurring purchases should be looked at to evaluate whether sales and use taxes could be minimized.  For example, large software/SaaS purchases that are “delivered” to you in a state that taxes software may actually be used in multiple states that do not tax software or SaaS.  Could there be an opportunity to recapture some of the tax that has been paid?
  3. Exemptions – Many states offer full or partial exemptions for certain purchases of qualified assets related to certain activities, including (but not limited to) manufacturing, research and telecommunication activities.  There may be an opportunity to review historic purchases for recovery opportunities.
  4. Review key contracts – For example, large contracts often bundle taxable and nontaxable items.  “Bundling” often results in the entire amount to be classified as taxable.  Could there be an opportunity to separately state each item in the contract and the invoice to reduce the amount of overall sales or use tax paid?  Even if you can’t renegotiate a contract now, perhaps planning can be done with respect to future contracts.
  5. Tax rate – Are you paying sales tax or self-assessing use tax at the correct rate?  For example, companies often take delivery of an asset at a central location, but the asset is placed in service in another location.  Could you take delivery of the asset in a more tax efficient location?

These are just a few of the areas that a company may find some tax saving or recovery opportunities.  Additionally, some states have offered formal programs to allow companies to pay sales tax late without incurring penalties and, in some cases, no interest.  While this does not eliminate a liability, it does offer some time to get finances in order.   So, what is the first step?  We suggest identifying where you have paid large amounts of tax (or expect to pay) over the past few years.  Once this exercise has identified the key area(s) of tax payment, we can then start looking at how you can begin to recover historic tax or reduce future tax obligations.  We are here to assist you throughout the process of identifying and recovering sales or use tax overpayments.

Have a question? Contact Miles Consulting Group.

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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