Shakespeare-Inspired Sales Tax Advice
“What's in a name? That which we call a rose by any other name would smell as sweet.”
What does Shakespeare have to do with sales and use tax? With his famous line from the play Romeo and Juliet, Shakespeare seems to suggest that a name is meaningless. It is just a label that has no impact on the object it describes. Try telling that to an auditor!
Too often, audit assessments are based on the labels and descriptions given to items used in manufacturing. Taking time to correctly code these items can save manufacturers thousands of tax dollars.
For more helpful advice to survive a sales tax audit, get this complimentary tip sheet:
Coding Tips for Manufacturers
Start with these coding tips of Cherry Bekaert’s sales tax experts:
1) Understand your state’s definition of consumable supplies vs. repair parts
Many states offer an exemption on repair parts for manufacturing equipment, but not for consumable supplies. Be consistent with the coding of supplies and understand how your state taxes your most used supplies and parts.
For example, look at fuses. Machinery will not run without fuses. They are an integral part to machinery. But fuses wear out quickly so they are rapidly consumed supplies for most manufacturers. Replacing worn out fuses also repairs machinery. Are fuses consumable supplies or repair parts in your state?
Given that many states tax consumable supplies but exempt repair parts, if your company typically codes rapidly consumed items as consumable supplies, the auditor may raise an eyebrow if an exemption is taken on the purchase of fuses since they are not expensed as repair parts.
2) Understand how and where equipment and supplies are used
Forklifts are a great example. They can be used on the production floor, as well as in other areas of your facility. Describing the forklift as “used in production” could open up a number of exemptions for the forklift, its repair parts, the energy needed to operate the forklift, and more. But, when the forklift is described as “used in shipping” . . . all of a sudden these expenses become taxable. What if the forklift is used interchangeably between the two areas? Expensing the forklift and related items to a taxable department could incorrectly influence a sales tax auditor's interpretation and taxability determination.
3) Use the correct names for manufacturing equipment and supplies
The name you give an item can impact its taxability. Storage tanks are good examples. Is your product blended in a storage tank? Most states consider blending to be part of the manufacturing process, but storage tanks are usually labeled as taxable equipment. If the name fits, identify the item as a blending tank to take advantage of exemptions.
4) Use the Correct Language in Capital Appropriation Requests (CARs)
Making sure you use the correct terminology helps your argument for exemption. Auditors always look to CARs for information as to what equipment is and how it is used. Include language that is used by the Department of Revenue that ties to the language of the sales tax exemptions.
5) Provide auditors with cheat sheets
Help auditors understand your company’s manufacturing terminology by giving them “cheat sheets” at the beginning of the audit process. It is much easier to deal with a questionable item before it ever gets put on the initial workpapers.
6) Train your purchasing departments
Teach key employees how to write purchase orders in such a way that correct verbiage is used from the start. This helps AP departments know when an exemption should be taken.
The Final Act
Although Shakespeare’s “course of true love never did run smooth,” your company may experience smoother audits and better tax compliance by following these tips from our sales tax experts. If you have questions or want more information about sales tax audits, visit the Cherry Bekaert website.