Anyone connected to the sales and use tax world, whether you’re in the industry or consulting/public accounting, is all too familiar with requesting tax refund claims of overpaid sales/use tax on certain purchases. Like all things sales and use tax-related, there are some general rules with respect to the overall process and the documentation/information needed. For example, many jurisdictions require the refund claim to follow the same path as the overpaid tax. In other words, if the tax was overpaid to the vendor, then certain jurisdictions require the buyer to seek a refund from the vendor. If it’s use tax, since it is paid directly to the taxing authorities, then those claims are filed with them. Simple right? Well, to use an oft-used phrase in the state and local tax realm, “it depends.”
A logical and practical view towards filing any sales and use tax refund claims not only looks at paths available for filing the actual claims, but one should also consider the ongoing business relationship with the vendor(s). All too often someone might find a substantial sales and use tax refund opportunity, only to find out later that the consumer company ceased doing business with the vendor, and in some cases, rather contentiously. That has bearing on what path a company might ultimately take, if the state even provides options. If a vendor was fired rather unceremoniously from a customer’s account, how likely do you think they are to cooperate with their former customer’s sales tax refund claim?
Ignoring the business relationships themselves, just as there are plenty of common threads and generalities among the states, there are many nuanced situations as well as it relates to refund claims. For example, many states have what are called refund assignment provisions. Essentially, a purchaser completes a part of a state-prescribed assignment form and sends it to the vendor(s) to complete the rest. The vendor is essentially attesting to the fact that tax was charged to the buyer on the transaction(s) in question and the vendor is giving up its right to later claim a refund of tax directly from that state on those specific purchases. These assignment provisions allow a buyer to essentially deal directly with the taxing authorities in getting their refunds.
Then you have a state like North Carolina. The Old North State doesn’t have any assignment provisions per se. However, they do offer what is essentially an assignment provision but only if the buyer that overpaid tax is undergoing a sales and use tax audit with the North Carolina Department of Revenue. North Carolina has a Form E-599M (nonpublished) that a consumer (i.e., the auditee) and its vendor(s) can complete that attests to the same information that a typical refund assignment form provides. Once completed and accepted by the North Carolina auditor, the buyer receives a non-projectable credit in its audit for the actual amount of tax overpaid to the vendor(s). Additionally, a consumer must give a vendor at least 60 days to respond to a request for refund before a cause of action can be filed against the vendor. Unless the amounts are very large, most customers will never take the legal route against a vendor since the potential legal fees could far outweigh the benefits.
Other states (e.g., Ohio) allow a buyer that overpaid tax to a vendor(s) to file a refund claim directly with the state. In the case of Ohio, if a buyer intends on filing the claim directly with the state, not only must the buyer submit copies of all vendor invoices on which tax was overpaid, it must also prove via cancelled checks or other similar evidence that the invoices were paid in full to the vendor(s). As you might expect, that adds a significant amount of work to an already lengthy process. In many instances, it’s far easier and quicker if a buyer can deal directly with the vendor.
That brings us to Tennessee and back to the general rules around refund claims. Tennessee law stipulates that like many states, buyers must file any refund claims of tax overpaid directly to vendors with the vendors themselves. However, pursuant to a new rule effective October 1, 2021*, the Department of Revenue will allow consumers to file a claim directly with the Department when the vendor is unresponsive or declines to refund the overpaid tax. The rule provides three requirements that must be satisfied in order for a consumer to be able to file a claim for the refund directly with the Department:
- The claim for refund must exceed $2,500 per dealer;
- The dealer must have collected the tax from the customer and remitted it to the department; and
- The customer must have requested a refund from the dealer on at least two separate occasions and the dealer failed or declined to issue the refund.
Of particular interest is the requirement that two attempts be made to secure the refund directly from the vendor(s). The second request for tax refund claim from the dealer may be made upon receiving a written refusal from the dealer or 30 days after the initial refund request is submitted, whichever occurs first. Additionally, as early as the filing of the second refund claim with the dealer, the customer must also request that the dealer complete a dealer attestation form. The information requested therein is very similar to the information in refund assignments, discussed earlier. Specifically, the dealer must attest to the following items under penalty of perjury:
- The taxes were remitted to the Department by the dealer, including the amount and the date remitted;
- The dealer has not claimed and will not claim a refund of such taxes;
- The dealer has not taken and will not take a credit for such taxes;
- The dealer’s sales and use tax account number; and
- The local jurisdiction or jurisdictions for which any local sales tax included in the refund claim was collected and remitted (amount remitted to each jurisdiction must be included).
After filing the second tax refund claim with the dealer, the customer must give the dealer 30 days to either (1) refund the overpaid tax, (2) complete and return the dealer attestation form, or (3) decline to do either (1) or (2), whether in writing or not. Only upon receiving the completed attestation form or the expiration of the 30-day period, whichever comes first, can the customer file its claim for the refund directly with the state.
I’ve had situations over the years where a vendor refused to cooperate, no matter how many calls and emails were sent, and without regard to whether I was willing to help them secure their refunds directly from the state. In those instances, I wished for the option to go directly to the state. This new Tennessee rule appears to give the consumer some viable options when it comes to filing refund claims. However, let’s also consider the fact that anytime a claim for refund is filed directly with a state taxing authority, one should be sure their “sales and use tax house” is in order. Filing a claim for a refund puts your company (or your client) front and center before that jurisdiction’s taxing authority. Does it automatically result in an audit? No, it doesn’t, not by any stretch. However, it could and as a steward of your employer’s (or your client’s) finances, you should be aware of that. It is a much shorter leap to an audit when a claim for a refund is filed directly with the state compared to one filed directly with a vendor.
Clarus Partners has deep technical resources that are familiar with the various tax refund claims and provisions around the US. Let us “kick the tires” on your business’ purchases to see if there are significant refunds worth pursuing. We can do this without risk to your company, making it truly a “win-win.”
* Tennessee Department of Revenue, Notice # 21-18 (September 2021).
By Brian Hollingsworth, CPA