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

June 18, 2024

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. To ensure that you’re taking full advantage of manufacturing exemptions, consider conducting a reverse sales and use tax audit.

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. But 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’s not used directly in the manufacturing process but that’s essential to the process. 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, and
  • Pollution control equipment.

Beware: Sales and use tax exemptions may change over time, so compliance can be 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. We have a team of manufacturing advisors who can help you start the audit process and recoup any sales and use tax overpayments.


 

Meet the Expert

Laura Jans, Senior Manager

Laura has a passion for helping clients in all facets of their business or individual taxes – including a special interest in estate planning and…

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