Sales Tax Issue

I have over 20 years solid sales tax experience in manufacturing. Prior to my working with my employer of two year, a sales audit occurred and it is my understanding the auditor told them that non-returnable pallets were taxable. The company accepted this explanation and began passing on this additional expense to their customers as a markup because they are a "cost plus" business. When I started with the company, I saw that they were taxing the pallets in error and talked with my supervisor about the issue and supported my position with a fact sheet from the DOR. I was blown off. Recently, one of our more astute customers came back and said their price for pallets were marked up by the sales tax in error and requested a reimbursement for the last three years. I was instructed to reduce the price by the sales tax amount without an explanation. The company does not want to do the work to ask for a refund from the state and pass it on to our customers. I'd like to get perspective from others.

Answers

Len Green Performance Improvement Consultant and ERP Strategist • June 24, 2014

I'd reflect on this from a few angles.

1. Your specific pallet sales tax refund issue=potentially large refund claim
2. Does the CFO fear that a request for a 3 year refund will trigger a state or federal tax audit on other issues that you may not be aware of? Kinda like "let sleeping dogs lie." You may not be privy to any prior history that could pose bigger problems.
3. Could your auditors/tax accountants make inquiries on your behalf anonymously before deciding on options?

Any others?

Lyle Newkirk CFO • June 25, 2014

I agree with Len on this issue. First, you sometimes do not want to open up prior years. But, if it is a big enough number, spend the money and get your outside tax professionals to check for you.
One other angle on this: If possible, find out if your competitors are also charging sales tax on pallets. If not, you could be putting your company at a pricing disadvantage by charging a sales tax when competitors are not. Ultimately you have to follow the law and not the competitive forces but your company needs to know if they are the only ones charging sales tax on pallets.

Anonymous Financial Analyst • June 26, 2014

Thank you for your responses. In our state, asking for a three year sales tax refund can be as routine as getting out of bed in the morning depending on the issue. Based on the nature of the state regulations, some organizations take a conservative approach and pay the tax first and go back and ask for the refund. I think the real issue for me is the lack of skills within the organization. This never should have happened. The state publishes fact sheets which are very clear on what is taxable and not taxable in industrial production.

Wayne Spivak President & CFO • June 26, 2014

You made the case to management. Assuming your company paid the tax; then nothing here described is illegal (just foolish). Don't push the issue - let it go, you did your job (and I'm sure you've documented and have saved your documentation).

Good job!

Len Green Performance Improvement Consultant and ERP Strategist • June 26, 2014

Anon
Regardless of what your execs do, you have a nice resume factoid for the future:

"Identified $ in potential tax savings through an incorrect application of sales tax laws and proposed a recovery plan to senior management"

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