How to Reduce Sales Tax Overpayments on MRO Supplies: A Guide for Manufacturers
November 3, 2022
Manufacturers must maintain an inventory of maintenance, repair and operating (MRO) supplies to keep machinery and equipment running at peak efficiency. Unfortunately, this is an area where sales and use tax is frequently overpaid. There are a variety of measures to implement to avoid this black hole of sales tax overpayments.
MRO Supplies
Maintaining equipment in operating condition for optimal productivity levels requires plant personnel to complete repairs with minimal disruption to the production line. For this reason, manufacturers often maintain a storehouse of MRO to avoid any production stoppages. Common examples of MRO supplies include:
- Lubricants
- Machine parts
- Safety equipment
- Cleaning products
Manufacturers normally purchase a high volume of MRO items monthly which can be used both in the production process (e.g., spare parts, consumables, etc.) and for general plant maintenance. These types of purchases are often obtained from vendors who sell a variety of equipment parts and general maintenance items.
Maintenance vs. Repair
Depending on the state where your manufacturing operations are located, your company could be missing out on significant tax savings if not taking advantage of sales tax exemptions for MRO items. To help determine if these items are eligible ask these questions:
- How expansive is the scope of the sales tax exemption?
- Does it include repair parts for manufacturing equipment?
- Does it include maintenance equipment and supplies?
Where your operations are located and how your MRO items are used determine whether they qualify as tax exempt. If your staff is unaware of these specific rules, exemptions could be missed or an audit could result in significant liabilities because insufficient tax was paid. The personnel running the plant operations must have a solid understanding of the taxability of all MRO supplies.
3 Common Ways Manufacturers Overpay or Underpay on MRO Supplies
There are three scenarios where manufacturers regularly overpay or underpay regarding MRO items:
- Companies charge for repair parts and other exempt supplies to the maintenance general ledger account at the time of purchase. For those states where maintenance is taxable, sales tax is often paid to the vendor or use tax is self-accrued in error.
- Companies charge MRO items to a store’s account without knowing the items’ specific uses at the time of purchase. In this scenario, it is impossible to know if tax is due. Companies typically lean towards being conservative and pay sales tax to the vendor or self-accrue use tax at the time of purchase, often resulting in overpayments.
- Manufacturers with multiple locations operating under a centralized accounting system face common problems related to tax underpayments or missing tax-saving opportunities. This often occurs when the accounts payable staff is not near the manufacturing plant, does not know what MRO supplies are used for, and is not familiar with the scope of the manufacturing exemption.
How To Avoid Overpaying Sales Tax on MRO Supplies
Your company must determine if they have been overpaying sales tax on MRO supplies, and if so, how much? There may be an opportunity where these overpayments can be recouped from the state to reinvest in your company’s growth projects. Train key employees to best determine the taxability of these products. Finally, processes must be developed and implemented to streamline the sales tax decision-making procedures.
These steps can be accomplished during a reverse audit by sales tax experts. This can help identify overpayments, secure refunds and train employees to avoid future mistakes.
Reach out to your Cherry Bekaert tax advisor to learn more about reverse audit services.
Not sure if your company is overpaying sales or use tax? Check out our checklist below.
20 Signs It’s Time for a Sales & Use Tax Tune Up Checklist
Purchases
- Invoices do not identify if the purchases are used during production.
- Invoices struggle to identify consumable supplies versus repair parts.
- Vendors are not required to break out materials and labor.
- A system is not set up to accrue use tax.
- Company lacks understanding of tax implications on real property work.
- Company treats all forklifts equally.
- A general storeroom contains taxable and exempt supplies.
- The date of your last utility taxability study is unknown.
- Company lacks process to determine the taxability of P-card or credit card purchases.
- Corporate mentality declares all purchases are exempt from sales tax.
Sales
- Many customer exemption certificates are missing, old, expired or lost.
- Company fails to collect sales tax in all these states where it conducts business.
- Company sells a mix of products and services.
Audits
- Company is currently under audit.
- Company’s last sales tax audit resulted in a large assessment… or no assessment.
- An audit induces anxiety for your company.
Processes
- Staff has not received sales and use tax training in over three years.
- Company makes tax decisions based on precedence and tradition.
- Company lacks a separate general ledger account for tax paid directly to vendors.
- Sales tax processes are automated, but are not checked for accuracy.