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Direct Pay Permits Cure Some Sales Tax Headaches

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Purchasing a variety of supplies from one vendor is common practice for manufacturers.  Some of these items may be exempt from sales tax while others are taxable.  Working with vendors on the taxability of multiple monthly purchases is a headache!

One cure is to purchase everything tax exempt from vendors and then self-accrue use tax for taxable items.  A direct pay permit allows companies to do this.  But obtaining a permit is not easy and the permit holder should be aware of the requirements and risks. 

What is a Direct Pay Permit?
A direct pay permit is issued by a jurisdiction and allows the holder of the permit to accrue and pay state and local taxes directly to the jurisdiction.  Companies should not think of a direct pay permit as a way of avoiding or evading tax payments.  Permit holders are closely monitored by jurisdictions and held accountable for filing errors.
 
How to Obtain the Permit
An applicant for a direct pay permit must apply in writing to the tax commissioner. Generally states only give direct pay permits out to larger companies with a need.  An applicant must establish a business purpose for seeking a direct pay permit and must demonstrate how the direct payment will benefit tax compliance. 
 
Permit Benefits 
The utilization of direct payment authority should accomplish one or more of the following:
  • Reduce the administrative work of determining taxability; collecting, verifying, calculating and/or remitting the tax;
  • Provide for improved compliance with the tax laws of the jurisdiction;
  • Provide for accurate compliance in circumstances where determination of taxability of the item is difficult or impractical at the time of purchase;
  • Provide for more accurate calculation of the tax where new or electronic business processes such as electronic data interchange, evaluated receipts settlement, or procurement cards are utilized;
  • Provide for more accurate determination and calculation of tax where significant automation and/or centralization of purchasing and/or accounting processes have occurred and applicant must comply with the laws and regulations of multiple state and local jurisdictions.
 
Permit Risks
A company is likely to be audited before the state will even issue a permit, in order to see if the necessary systems are in place to self-assess the tax properly.  If a direct pay permit is issued, it is almost guaranteed that you will be audited every three years because the state is now relying on your company to correctly self-assess taxes. 

 Also, in some states direct pay permits are not allowed to be used for every purchase.  For example, they are usually not permitted to be used for motor vehicles, enumerated services, and many other transactions which are documented in the state statutes. 

And remember to keep good records because it is the responsibility of the direct pay permit holder to maintain all of the records necessary to determine the correct tax liability has been paid. 

Bottom Line
Direct Pay Permits can save a company time and money by putting control of sales and use tax compliance in your pocket.  If your purchasing staff has a clear understanding of the company’s manufacturing process and the tax regulations for jurisdictions, a direct pay permit may be the best medicine for curing sales tax headaches.
 

 Want to learn more about Direct Pay Permits?  Cherry Bekaert is ready to help!  Send us your questions and one of our sales tax experts will contact you.

Get Sales Tax Answers! Submit your questions.

 

 

 

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI

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