Sales & Use Tax Recovery Audits

Capital Projects are a Source of Recoveries

Manufacturing Capital Projects - Taxing authorities limit manufacturing equipment exemptions, yet there are tremendous savings in this area

Construction Contracts - State laws or regulations define a contractor as the consumer, making him responsible for taxes on materials that would otherwise be exempt to the owner.

Installation Contracts - There are usually recoverable taxes which are buried in material costs

Operating Costs - Discovery of exemptions for expansion projects which apply to ongoing operations

Tax Changes - New legislation, court cases, and administrative rulings may create opportunities to request refunds or expand exemptions.

The bountiful harvest in manufacturing operations

Product ingredients or raw materials - Sometimes there are chemicals or other materials which contact the product but which may not remain a component throughout the process

Packaging Materials- Treatment of these vary between states, confounding tax accounting systems

Equipment Installation Contracts - Labor is usually exempt. There may be recoverable taxes which are buried in material costs. (Some restrictive states tax both labor and material.)

Freight - The taxability cost component can produce substantial savings

Repair parts - Such parts are taxable in some states, yet are exempt in others

Pollution Control Facilities

States have pollution control exemptions for air and water effluent control systems

Pollution control exemptions are generally broader than manufacturing exemptions - for example South Carolina exempts everything within the fence of a qualifying facility.

Materials - Treatment chemicals and other operating materials may be exempt

 

Why Sales/Use Tax is a lucrative area for recoveries

Tax rates of 4 to 10% are imposed on thousands of transactions

Corporations with multi-state operations find it nearly impossible to program tax payment systems geared to the unique tax laws and regulations of the various states

Sales/use tax is one of those areas for which no single corporate department has control or responsibility

Overwhelmed tax department professionals can only deal with major transactions

State revenue audits focus on tax underpayments, not overpayments. The company can negate tax assessments by conducting a counteraudit and applying for refunds.

Statutes of limitations range from 6 months to 5 years, limiting the window of opportunity.

 

What is the recovery potential?

Examples of tax recovery efforts by CRW

These illustrated examples are taken from recovery efforts undertaken by CRW, Inc. and those conducted by CRW founder Al Gray during his tenure as a capital projects auditor.

TAX EXAMPLE		ISSUE		SOLUTION
Accounting Systems The capabilities of tax accounting systems used by construction management firms, general contractors, or large subcontractors to handle project requirements may be limited.		Client A had sustained multiple changes in sales/use tax accounting for a $50 MM project. The systems had lost the ability to track and secure an expected refund of $325 M.   Client B had undergone explosive growth in its business. The tax accounting systems were inadequate to record, bill, and recover sales/use tax payments.		CRW downloaded 22,000 transactions subject to tax, analyzed the data, restated the tax accounting for the project, identified additional exemptions and applied for refunds of $1.2 MM. Client A received refunds totaling $950 M . CRW loaded all material taxable transactions into a database, restated the tax accounting for 4 projects exceeding $75MM, and provided reports which facilitated the recovery of more than $500 M in taxes.
Manufacturing Operations Manufacturing operations are complex. Sales/Use tax laws and regulations are also complex. The compounded complexity creates tax payment errors, particularly for clients with multi-state operations.		Client C had similar operations in 5 states, with most of the plants being sited in North Carolina. A plant in Georgia had undergone expansion projects of more than $110 MM. The client felt that there were potential tax recoveries of $80 to $100 M.   The client engaged CRW to evaluate and pursue cost recovery options.		CRW evaluated the capital spending and operations costs which had occured at the plant within the statute of limitations. Several categories of operations purchases were found to be exempt in Georgia despite being specifically taxable in North Carolina. CRW submitted a refund claim, resulting in recovery of more than $365 M for the client.
Equipment Exemptions Most states exempt manufacturing equipment, yet there is a body of law and regulation in each state that limits the exemptions, usually to equipment "used directly" in manufacturing.		Manufacturer D had applied for exemptions for all of the major systems in its new $100 MM facility. The state Department of Revenue ruled several of the systems to be taxable on the basis that the equipment was not used directly in manufacturing.   The capital projects auditor researched the tax issue further.		The case law, regulations, and available rulings related to the type of manufacturing were reviewed. The specifications, functionality, and location of the equipment were reviewed. The auditor found previously undiscovered exemptions and revised applications for existing ones. A revised application for exemption was submitted and approved, savings more than $1.1 MM
Construction Contracts Were there avoidable buried taxes in your construction contracts?		Manufacturer E had secured exemptions for all of the major systems and equipment for its new $85 MM facility. The manufacturing process equipment that "E" purchased directly was exempted. However, contractors were supplying additional exempt equipment and systems for which no tax planning had been performed. Contractors had paid the taxes and buried them in the lump sum price of the construction contracts.		Working with the owner, general contractor, and mechanical, electrical, and HVAC subcontractors, CRW was able to secure refunds of $172 M. Substantial refunds are available on nearly every sizable manufacturing project and on some building projects in states which allow refunds of building materials used in government projects.
Design Changes Design changes can produce increased exemptions, IF THERE IS SOMEONE TO RECOGNIZE THEM! Process changes can also change taxability.		Manufacturer F was a heavy user of river process water. Incoming water supply piping was determined to be taxable up to the initial point of treatment. An engineering change subsequently was approved which moved the injection of treatment chemicals 1 mile closer to the river.		The project auditor noted the change a successfully pursued a refund claim of approximately $12,000.

Who can benefit?

Manufacturers Local governments Educational facilities Contractors (in some states)

Why use a firm like CRW?

The successful CRW Sales Tax Recovery Method can be summarized as follows:

1. Determine the extent of existing tax avoidance methods by reviewing revenue rulings, tax accounting systems, and interviewing personnel responsible for tax administration.
2. Review the current scope of the project versus the original scope to identify any additional exempt scope.
3. Research the exemptions available in the state, how rulings have modified those exemptions, and whether there are additional exemptions available.
4. If necessary, request a revenue ruling approving the new exemptions from the state revenue department.
5. Review the scope of all major subcontracts to identify those incorporating potentially exempt materials, estimate the percentage of exempt materials, determine whether taxes have been paid.
6. Provide the client with a plan to secure refunds, an estimate of the recoverable taxes and an estimate of the costs of performing the recovery effort.
7. Perform the recovery process if the effort will provide an adequate return and it is approved by the client.

CRW produces returns of a MINIMUM OF $3:$1 by using proven systems, a wide body of knowledge, research, and an emphasis on superior returns for its clients.

Prospective clients who wish to avoid the necessity of applying for refunds and achieve maximum should consider a thorough tax planning effort for their projects which is coupled with the project auditing function.

How does CRW produce such attractive returns on tax reviews?

Capability to quickly assess the potential for recoveries. Experience testing for multiple factors during a single pass of the drawings, specifications and transactions. Hours are dramatically reduced as a result

Emphasis on proactive measures achieves quantifiable savings for future projects or ongoing manufacturing operations.

Reasonable fees with performance incentives insure that the client obtains results. Reviews judged to be unproductive are swiftly terminated at no charge to the client.

Utilization of contract auditors and temporary accounting clerks lowers average hourly costs.

Proven tax recovery methods employed in the southeastern states including the use of tax databases, spreadsheets, and templates.

CRW can restate the tax accounting for an entire project, if required, to achieve results!

Contingency fee reviews are welcomed. With our record of results we will gladly accommodate clients who desire a ZERO RISK solution.