Reverse Sales and Use Tax Audits for Transportation and Distribution

State taxing authorities audit for underpayments of sales and use taxes, but what about overpayments slipping through the cracks? That’s where a “reverse” audit is beneficial. A CLA reverse sales and use tax audit can help you pinpoint and reclaim sales and use tax overpayments. It can result in a substantial cash windfall.

Sales and use tax challenges in transportation and distribution

Operating across state lines in transportation and distribution means juggling a maze of tax regulations. On the purchasing side, this means having to identify which states provide sales tax exemptions for motor carriers, what the exemptions cover, how to claim the exemptions, etc. States such as Florida, Illinois, Indiana, Michigan, Minnesota, Missouri, and Ohio have complex exemption tax laws and requirements.

Several states, including Illinois, offer a full exemption for repair parts claimed by providing an exemption certificate to the vendor. However, what type of repair parts and accessories qualify for the exemption vary by location.

Indiana has one of the broadest exemptions applying to all tangible personal property “reasonably necessary” for transportation services. Michigan has a much narrower exemption, only applying to replacement parts for items that were a component of the truck/trailer when purchased.

Other states, such as Minnesota, offer a partial exemption for repair parts requiring the carrier to register for a direct-pay permit and remit the partial tax due on its own state filings. There are also several different qualifying criteria, such as whether the exemption applies to carriers delivering their own freight or if the transportation services must be for hire.

Because of these different nuances, it’s extremely difficult for a transportation or distribution company to capture all sales and use tax exemptions when making purchases in multiple states.

How reverse sales and use tax audits can help transportation and distribution companies

Reverse sales and use tax audits can help pinpoint and reclaim sales and use tax overpayments. Our process includes:

1. Free feasibility study — Initial sample review of expense and fixed asset invoices to identify potential sales and use tax overpayments.
2. Validation — Compile and validate all necessary documentation and support each claim with detailed explanation and statutory support.
3. Implementation — Submit your refund claim packages to state tax authorities and follow up until you get your incorrectly paid taxes back. During this process, we work with your team to develop procedures to capture these savings in real time going forward.

Refund submissions are based on states’ rules and regulations and are reviewed and approved by state taxing authorities.

Real results for transportation and distribution companies

We’ve worked with companies of various sizes and have assisted companies with filing tax refund claims in many states. Examples include:

• A company with ~150 trucks obtained tax refunds in eight states for nearly $300,000. All the claims were for tax overpaid on repair parts and accessories.
• A company with ~ 300 trucks obtained a tax refund of approximately $140,000 from a review of their home state’s tax law - primarily for purchases of repair parts and over-accruals of use tax.
• A company with a fleet of ~ 1,000 trucks recovered approximately $130,000 in taxes. While this company was capturing exemptions on repair parts, they were overpaying tax on intercompany trailer leases.

Reverse sales and use tax audits have empowered both small and large carriers to recoup cash — improving cash-flow, liquidity and setting the foundation for smarter fiscal management.

How CLA can help with reverse sales and use tax audits

CLA’s transportation and distribution state and local tax professionals can help you assess your tax obligations and claim exemptions and tax refunds. If a reverse audit makes sense for your business (based on our initial feasibility study), we can help you through that process. State tax laws can be confusing and onerous, and professional guidance can be beneficial in understanding and complying with them — we can help you with not paying more than what you owe.

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Don’t overpay your taxes — explore the benefits of a reverse sales and use tax audit. Complete the form below to connect with CLA.