Hi everyone,

Welcome to this week’s tax tip! Today, we’re talking about a scenario that happens more often than many business owners realize—what to do if you overpay sales or use tax.

Whether it’s due to a vendor mistake, a misapplied tax rate, or an error in how you accrued use tax internally, it’s important to know that you have options to claim a credit or refund. Understanding how to handle these situations properly can save your business money—and potentially prevent future audit headaches.

Common Reasons for Overpayment

There are several ways businesses end up overpaying sales or use tax, including:

• A vendor charged sales tax on a tax-exempt item.

• You accrued use tax on a purchase that should have been tax-exempt.

• A vendor applied a tax rate that was higher than what was legally due.

• You self-assessed tax on an item that was actually exempt in your jurisdiction.

Let’s take a moment to review what use tax accrual actually means. Use tax is owed when you purchase a taxable item but the vendor does not charge sales tax. In this case, it’s your responsibility to calculate and remit the tax. These transactions typically appear in the “Taxable Purchases” section of your sales and use tax return.

If you’re unfamiliar with how taxable purchases and use tax work, we’ve covered this in a couple of our earlier videos. You can check them out for a more in-depth explanation.

What to Do If You Overpay Sales or Use Tax

Once you identify an overpayment, you have two main options:

1. File a Refund or Credit Request with the Taxing Authority

This is a formal process where you submit documentation to the taxing authority, requesting a refund or credit for the overpaid tax.

Pros:

• The tax authority will validate the claim. If approved, it offers peace of mind should that period ever be audited.

• The credit is documented and approved, so it’s less likely to be reversed later.

Cons:

• This process may trigger a sales and use tax audit, especially if the refund amount is large.

• The request may take time, and there is no guarantee of approval if documentation is insufficient.

2. Take a Credit on Your Next Tax Return

Another option is to adjust your next sales and use tax return to reflect the overpayment.

Pros:

• It’s a quick and easy process, allowing you to recover the overpayment in the next filing period.

• No need to go through a lengthy review process—just update your return.

Cons:

• If audited later and the adjustment is found to be improper, you could owe the tax, along with penalties and interest.

• You must maintain detailed records explaining why the adjustment was made.

In both cases, good recordkeeping is crucial. Retain invoices, exemption certificates, internal emails, credit memos, and any other supporting documentation for at least as long as the statute of limitations in your state.

Be Aware of Statute of Limitations

Speaking of time limits, keep in mind that your ability to claim a credit is restricted by the statute of limitations in your jurisdiction.

For example, if your business has been overpaying tax for the past six years, but the applicable statute of limitations is only three years, you will only be able to claim a credit for those last three years. The older overpayments are unfortunately lost.

Each jurisdiction sets its own limits and procedures, so be sure to confirm these details for every state or locality in which you do business.

Final Thoughts

If you’ve discovered that your business has overpaid sales or use tax, don’t panic. There are remedies available, and taking action now could lead to significant savings. The key is to evaluate your options, document your findings, and follow the correct procedure for your jurisdiction.

And that’s your weekly tax tip!

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  DISCLAIMER: This post provides general tax information and is not a substitute for personalized tax advice. Laws and procedures are subject to change. Always consult a tax professional about your specific situation.

   

Key Takeaways:

• Whether you accrued use tax incorrectly, a vendor charged sales tax on an item that is tax-exempt, or the tax rate charged is higher than what was legally due, each taxing jurisdiction has remedies available to address instances where too much tax was charged or accrued.
• When determining how to address the overpayment, you must decide what works best for your business.
• Questions that should be asked include: Is the credit amount substantial? Would you feel more comfortable submitting all the appropriate documentation to the taxing authority so that they can confirm it is valid? Is the overpayment a small dollar amount where you would feel comfortable making an adjustment on your next sales and use tax return? 
• Keep in mind that the credits are limited to the statute of limitation in your jurisdiction.
• Each taxing jurisdiction has their own procedures and policies regarding credits. Check out the procedures that are applicable in the jurisdictions where you conduct business for more information.
• DISCLAIMER: Please note that we are providing generalized tips regarding this topic. This video does not contain our opinion or advice about your business or your particular situation.

Today, we are going to discuss what you can do when you discover that you have overpaid sales or use tax on the purchase that you make for your business.  Whether you accrued use tax incorrectly, a vendor charged sales tax on an item that is tax-exempt, or the tax rate charged is higher than what was legally due, each taxing jurisdiction has remedies available to address instances where too much tax was charged or accrued.  We talk about it in the video below.