On-Demand: Sales and Use Tax Compliance Insights
July 29, 2020
This webinar covered both compliance and proactive steps companies can take to mitigate the impact of sales and use tax matters, as well as pursue refunds if eligible.
Andria Siciliano:To go through the agenda, we'll be covering some nexus, the Wayfair decision. We'll do some current sales tax environments and where we are now, and we'll try to touch on refunds and reverse audits. If you have any questions during the broadcast, feel free to send them across and we'll try to answer some of them as we go or throughout the session. We're going to start with nexus. To understand nexus, we have to go back from the beginning because things have evolved quite a lot in the last 20 years.
The US constitution has limits and the state powers that's objective to which laws the state can enact on different businesses. And there's usually no distinction in the constitution between a nexus requirement for the different tax types. One of the first cases that was brought to the attention that distinguished the nexus requirements under the commerce clause and the due process clause was the Quill case. And has been interpreted as splitting nexus standards for different types of taxes.
The case was a North Dakota case and North Dakota filed an action in the state court to force Quill and out of state mail order office, equipment retailer to charge North Dakota use tax on merchandise that was being used in the state. Now, Quill didn't have any physical location in North Dakota and nor did it have any employees. Quill sold office equipment and stationary in North Dakota by use of catalogs, and other advertisements, and making telephone calls. Deliveries of their products were made via the post office or common carriers from out-of-state location.
Quill would have been required to pay back taxes for three years had the ruling gone in favor of North Dakota. But the Supreme court ruled that the business must have a physical presence in the state to be required to collect sales and use tax. So North Dakota was the first one to start saying, "Okay. We need a physical presence in the state." But shortly after the Quill physical presence requirements, other companies and states started trying to chip away at this physical presence standard. There was the Geoffrey case, which was the beginning of the economic nexus standards.
And then there were other states after that, that once the South Carolina and the Jeffery case is finished, that more states were jumping on the bandwagon for the income taxes. They generally stayed away from the economic nexus for sales taxes, but instead they were trying to do other types of nexus other than physical presence, such as an agency or an affiliate nexus. An agency nexus and affiliate nexus are basically when you have multiple companies that are working in the same states and they're related company. So then that when one company is in a state, it pulls in the other company to give it nexus as well just simply because they're related.
There were several other cases that follow the Quill case that was chipping away at this whole nexus physical presence standard. You had the Barnes & Noble case, the Scholastic case, Scripto case, and the Tyler Pipeline, all of these were significant cases that were helping to reduce the physical presence requirements that the Quill case had brought to light. And as time continued on and not so long ago, the states became more aggressive and more aggressive and they continued to push the limits. You had the Amazon nexus provisions and you had click-through nexus provisions.
So if you were selling through Amazon, they had provisions where they were saying, "Okay. Well, now you need to collect tax because you're just selling on Amazon." And then from there, we've had the marketplace nexus. And the marketplace nexus was basically saying that if you're selling on a marketplace similar to Amazon and Etsy or something like that, those places would have to charge sales tax for you. And one thing to note about this marketplace nexus, which I think a lot of companies miss is, while you're selling on this website and I say Amazon's collecting sales tax for you for other States, it's noted that you probably should be registered in that state if you're not.
Because just the fact that Amazon's collecting and remitting on your behalf, the state usually likes to know that your sales are matching up with what Amazon's reporting on your behalf. So just something to think about. We also have the bright-line nexus standards that came in. These are mostly income tax nexus issues. But before Wayfair, the bright-line nexus issues were really for income tax before Wayfair. And you can see there's like 10 states that that mostly applied to. Then we have the Wayfair decision.
Right now I'd hope that most of us has heard about the Wayfair decision. It was a South Dakota case whereby South Dakota wanted a company called Wayfair who is an online retailer. They sold various household products in South Dakota. People would go online, you could order cabinets, or chairs, and tables, and whatnot online, and then Wayfair would take your order and ship it to in South Dakota. I mean, they do this in all the states, but South Dakota is the issue here.
So what happened was South Dakota said, "Hey, we want you to start charging sales tax on the sales into South Dakota." And Wayfair was like, "Well, why? I don't have a physical presence." And they said, well, it's because we have these physical presence rules, but we also have rules that say, "Look, if you're selling sales and personal property and it's being transferred electronically, and the services are delivered in South Dakota, and it exceeds $100,000 we want you to register and remit tax. And then also if you're doing that and you exceed more than 200 transactions, we think you should collect and remit tax on our behalf."
And Wayfair was like, "Yeah, I don't think so. I don't have a physical presence in the state." And South Dakota was like, "Yep." And so it went all the way up to the Supreme court. And in July of 2018, we ended up having what they call the Wayfair decision. So we say, "Well, if you don't have a physical presence, then what are we substantiating the nexus on?" And they say, "Well, if the business avails itself of the substantial privilege of carrying on business in that jurisdiction then you have a physical presence."
Well, how do we do that? How do we prove that? Well, we're looking at your contracts, we're going to look at how your contracts are written, where your services are being rendered, who's getting the economic benefit. And the court felt that a business couldn't meet the 100,000 or 200,000 transaction threshold, unless it availed itself of the substantial privilege of carrying on a business. So, what types of businesses are impacted by Wayfair? Well, basically it was supposed to, or it seemed like it was just going to be an online or online businesses, but really this really impacted almost everybody from small little companies to large companies.
I've seen it affect software companies, I've seen it affects service companies, I've seen it affect just about every industry that you can think of. It has such a broad sweeping impact. So basically, what I see for businesses is that it was impacting distribution software, I think I've hit them all, service companies. Yep. And then we have this question. So some of these questions were well, does it impact these foreign sales? So what I've seen personally, if I have a UK client who's coming in and they're selling products, technically they now have reached nexus if they've met the economic threshold.
And so what I've seen is a couple of things, does a foreign company have nexus if they meet the threshold? The answer probably is, yes. And that would be the correct answer. But can a state really enforced the foreign company? I don't know. Can they really enforce a company that's from the UK to file and remit and be able to go after them? I'm not really sure how that works, so I'm just going to be honest here. But what I have seen is states have tried to do that. I've had a couple of audits and it's quite interesting how Wayfair is still so new that even the states are trying to figure out how can we go after these companies and bring them in to have them help collect sales tax to help our revenues.
So what should you do? Every company is different. And there are so many variations. There's no two companies alike. That's what I can say for sure. There's always a different fact or a different circumstance that we really need to look at every company on an individual basis. There are common courses of action we consider and there's potential pitfalls that you can hit along the way, so you need to be cautious as you look at this. Because of Wayfair we've seen a lot of companies and this is what we recommend. You need to reevaluate your nexus footprint. Where are you now based on the sales, based on your employees, based on your brick and mortar stores, based on your contracts, your online service contracts? Where are you now?
Because I can tell you that if you were just in two states before Wayfair, you're probably in way more states after the Wayfair decision. And a lot of companies are really still just catching up to this situation. And really it's going to depend on your business type, which thresholds are you triggering? Every state has a different threshold, but most states are around $100,000 and 200 transactions. That's not all states, it's some states. So some of the states might have a 500,000 and 200 transactions. So it depends on your state.
I think Massachusetts is a $500,000 threshold; New York is a $300,000 threshold. So you have to look at each state and what you have going on in every one of these states. And you'll need to make a decision on how conservative or aggressive you want to be, and making sure when you register with the business and when you start remitting with the business. So we've had some clients who are very conservative. We go back to the 2018 decision date, and we filed returns, back file the returns for that, and make sure that they are all current caught up.
Now, the downside to this is that in some of these companies, they can't go back and get the money from the customer anymore, or maybe they choose not to get to money from the customer anymore. And so in that case they end up having to eat the packs. They pay it out of their own pockets, the exposure or the liability. Now, I have other companies who are on this extreme, aggressive side, where they say, "Hey, register me as of today and let's move forward. And I'll know that my risk is from this point prior to the decision and when it went active in my state."
So I'll take the chance of an auditor coming in and seeing and know that my exposure might be for one or two audits versus all 50 states type thing. And basically, I have a couple of questions that I thought maybe I might be able to answer. One of them says, when you cross that threshold, does that mean you have nexus for life, or can you reanalyze it every year? You can reanalyze it, I don't necessarily think it would be every year. But you have to be careful when you register in a state, if you have nexus at one period, you don't want to necessarily deregister later on.
That creates flags within the state, and so that can also trigger audit. So you don't want to register, deregister, register. We usually say it's smarter to stay registered unless you really have no activity in that state for an extended period of time. So just something to think about. 200 transactions or 200,000? So it's $200,000, sorry, and 200 transactions in some states. If I said 200,000 transactions, I'm sorry.
And then the other thing is what is a transaction? We don't know what a transaction is in most cases, but from a state perspective I don't know if it's 200 widgets that I'm selling, or if it's 200 invoices, or what constitutes that 200 transactions. So we've been basing our logic that it is based on the 200 transactions, which would be invoices or line items. It hasn't really been clearly defined in my opinion, but that's what I think it's very easy to get nexus right now for sales tax purposes.
And then one other question, does an employee working from home in different states create nexus for your company in these states? Yes, it does. And it does create nexus in these states because you have a physical presence; property, payroll, and sales is your basic nexus physical presence standards. And so having one of those in the states, it definitely gives you nexus for sales tax purposes.
Is it necessary to register with the state secretary of state if you are remote seller or is it better to just register? So when it comes to the secretary of state registration, it's usually a legal decision, we usually tell you to reach out to an attorney to determine that. If you're remote seller, we don't usually register with the secretary of state, but it really depends on what you're going to be doing legally in that state that would require you to register. So I defer you to an attorney who would know way better than I would.
So I'm going to move on a little bit here. Before registering in state, what do we need to look for? Before you register in states, see what your exposure is because once you register the states are going to wonder, "What have you been doing in my state?" They're going to send you a nexus questionnaire. And they're going to basically say, "Hey, what have you been doing? Do you have people? When was your first sale?" And they're going to start figuring out how long have you been making sales in their state. And then they're going to start asking to figure out, should you have been registered earlier?
So before you do register and before you determine which date you're going to put as your start date, make sure you know what your exposure is and any additional issues that you might encounter should you have been registered for income tax maybe. And will this trigger an income tax issue? And you may find that several states where you need to address priors of exposure before registering, now include non-sales taxes.
So as I was just saying, it could be an income tax issue. It could be a gross receipt issue. It could be Washington has a B&O issue where you hit thresholds earlier. They had a B&O threshold before they even had the Wayfair decision threshold, the economic threshold. And so what I've seen is I've had a client who had to go back and pay more B&O taxes because they hit that B&O threshold and didn't realize it. And then they hit the economic. And once they registered for sales tax and were paying sales tax and B&O at that point, they had to go back and pay the B&O. Which is relatively a small percentage, but still it's an exposure. So just little things to think about.
Taxability and sourcing, we have lots of discussions with client and we look at the taxability of your revenue stream and how you're sourcing the revenues. Some things that are good to know is, I have a lot of software companies who are currently sourcing their revenue based off of the billing address, that a lot of states are saying basically that, Texas for example, will say that if you do have users in our state and we know that we have users in our state, we're going to come after you for that portion of revenue that we can allocate to our state. Because really sales tax is a destination-based model.
When you're figuring out your exposure and what things are taxable, it's important to figure out exactly how to source that revenue properly. I guess, how to source it properly.
I was looking at one of these questions here. If in year one you exceed 100,000 in a state and you don't have a physical presence and the next year you only have say 70,000 of sales in a state you file sales tax for the 70,000 for that year. Once registered in a state, all sales need to be reported. This is interesting. So if you exceed your threshold of 100,000 in the prior year, you're obligated to register even though your current year is less than 100,000. Now, if you choose not to, that's a risk. But technically, you hit the threshold in most of these states because they are saying once you hit that 100,000 in the prior year or even in the current year, that you are obligated to register and remit.
So currently, the Wayfair has triggered an economic threshold in just about every state. There's only a few states that we do not have an economic threshold requirement that would be; Florida, Missouri, New Hampshire, Oregon, Montana, and Delaware. That should be my sixth. So everywhere else basically has some sort of an economic threshold in place. So in addition to the economic, you have the physical presence test, which we said was a brick and mortar store and employee inventory. Anything like that; property, payroll, and sales is what I used to say is what's going to give you nexus. And you don't have to have all of them, it's really just one of them for sales tax purposes.
If you have a related party having a contractor in a state doing work on your behalf, that's going to give you nexus in a state. If you have a click-through nexus where you're buying something online and that you're using one of those ones, it pushes you through to the site that you need it. Usually, it's like an advertisement that helps you get to where you needed to go. That is giving you nexus as well. So that's where we're at. And just to know that why Wayfair was a sales tax case, is impacting other taxes. So we've seen the impact now for income tax. And we've seen the impact now for a franchise tax and net worth taxes.
The Wayfair case really had a broad reach more so than that I even anticipate it was going to have. I never thought that the Supreme court would have overruled all these other cases and said, "Yes. Okay, we see that," but they did. And so here we are. So now many states have this term of doing business in the state, which is very broad, as we were discussing, and really just brings in just about everything. And they are enforcing the economic nexus for income tax purposes as well. And some of the states have added bright-line nexus provisions, which is a similar type of thing but still different from the economic thresholds of sales tax.
So what are some pitfalls that we see? Companies that are not on top of nexus footprint have several areas of exposure and pitfalls. And we address some of these. They have sales tax exposure where now they went back and they have to go and pay the sales tax because they want to be in compliance. Well, a lot of times you can't go back to your customers and ask for the taxes to be paid. Now, you can only do it on a go forward basis. So what do you do with that? On a conservative approach, you would be eating that tax as a business and paying it out of your own pocket.
So those underpayments are exposures. They have due diligence issues. They're not filing where they should be. They're not taxing where they should be. When you start having to register in all these states, every state is its own entity or its own country, I feel like. And they all have their different rules. So while your product might be taxable in one state, it may not be taxable in another state. Or while your service might be taxable here, it might not be taxable there. Or while it might be at the full rate here, it's only at a partial rate there.
So you really have to go through once you have that nexus footprint down and figure out, "How am I going to be taxed now?" And then you got to take it back and figure out, "What kind of relationship do I have with my customer? Can I go back to them?" Maybe I have one customer and I make one big sale. Maybe I can go back to them and say, "Hey, did you accrue use tax on this particular invoice because I didn't tax you on this $100,000 invoice and I have exposure. And if you didn't then, can I go back? And can I bill you for this invoice so that I've protected myself because I realized that we should have been registered. And we're under the Wayfair decision, we need to be remitting this tax."
So based on your customer relationships, you have a couple of options. You either eat the tax, or maybe you can ask them for to pay it because they should have. On the contrary, if they paid it under the use tax, getting documentation to support that for your records is also acceptable. So that, "Hey, I didn't pay. I should've paid it. I didn't collect it from my customer, but hey, my customer paid it." So at the end of the day, that I'm good. But you have to be able to prove that.
Some other pitfalls that we've seen are companies that we see at most or e-comm companies, which almost everybody is online these days and selling stuff through the internet. And so for these companies, we see the biggest impact; service companies, IT companies, anybody who's like electronic, online doing anything. And typical issues we see remote employees. We address that in one of the questions. Almost everybody has remote employees now with COVID. And so now we have nexus in all these states because they're working from home, it is what it is. We have issues with say Amazon or Fulfillment by Amazon because Amazon has inventory.
When you do your contract with Amazon, you can see that Amazon can store your inventory in any number of states and location to be able to fulfill their orders quickly. And so when you have that inventory in all these states, now you have nexus in all these states because of that Fulfillment by Amazon and the remote inventory being in any of these things. And then we talked about international companies, things that we've seen with them. We have foreign companies who are not familiar with US taxes. They are very confused with it. And they will take a tax from an invoice that were charged to them and then they'll offset it from their sales tax, which is no good. We can't do that. But that's the way that works.
In the the UK or Canada they have a trickle down approach where you're always taxed, but you get credits that offset the liabilities. And so they get confused coming to the US and doing the sales tax where we tax on the final consumer. So that is another pitfall that we've seen with different companies. What else? COVID has just impacted everybody tremendously. And it has taken a toll on the sales tax and the compliance. So just as a couple of things to note, a lot of the states have been pretty good with abating penalties and interest for late filings and payments under the COVID rules. So that's been pretty nice.
We've actually had a client who we had to adjust prepayments for. Because prepayments are supposed to be based off of current sales, sometimes they're based off of last year's in an estimate. But we've spoken to the states and the ones that we had to make estimated payments in. And we said, "Hey, we're not bringing in any revenue, we have all these brick and mortar stores, our revenue is significantly lower. If I continue to pay this prepayment, all I'm doing is putting a huge credit on my account, an insane amount of money. So I don't want you to have all that because I don't have enough sales to even come close to the liabilities."
So one of the things that we did with the states was we worked with and negotiated them and we say, "Look, we'll pay based on current months until we're out of this COVID crisis. And then we'll go back to the old way and we'll pay these normal amounts that we're expected to pay. But right now, these prepayments just aren't making sense for what we're doing." So that's something that we've seen based on COVID. Another thing is most of them are not offering extension to file and pay these taxes. I mean pay, yes, maybe, but they still expect you to file. And honestly, they're not allowing you to giving you an extension for payment either because they figure, as a company, you're collecting the tax on their behalf, that is not your money to begin with.
So by using that money for your overhead costs and such, you shouldn't be as I guess the long story short. The money you should be collecting should go into its own little account, and then it should be paid out. You're basically just a facilitator in this transaction. So to use that money for your overhead fees, it's usually considered unacceptable. Now, California is saying, "Okay, we'll allow you to do that. But if you want to do that, you're going to apply for an extension and you're going to pay it back by a certain timeframe." And it's a process, it's a process.
It's almost easier just to collect and remit the tax because if you consider it that that money isn't really supposed to be the businesses, it makes it a little bit easier to just budget based on what you are supposed to budget on and not based off of that sales tax. So that's some of the things we've seen as COVID came into play. I've seen some couple interesting things, New Jersey just came out with some guidance. I haven't seen this yet personally, but apparently there are businesses that are beginning to assess a COVID surcharge on their invoices, which I think is interesting.
And I guess that's basically to offset the overhead of the PPE and the cleaning, that's the extra cleaning that they have to do. So like a company, that's a restaurant. Basically, New Jersey said, "Look, is this surcharge subject to tax?" And basically they're saying it's like shipping. Generally, shipping charges follow the taxability of the item. So if you're selling something that is tangible personal property and you have a shipping charge on it, then both of those costs are going to be subject to tax assuming that item is taxable. Now, if you're shipping something that isn't taxable, then usually the shipping charge isn't taxable.
Well, apparently New Jersey is saying, "Look, if you're assessing this fee, say on a restaurant and the restaurant invoices on your receipt, then because your bill is subject to tax, your food bill is subject to tax, the COVID surcharge is also going to be subject to tax." Which I thought was really interesting. And then same flip side, if they are still assessing the surcharge and the type of thing that the person's buying is not subject to sales tax, then the surcharge would not be subject to sales tax as well. So I found that really interesting, that is really recent and hot off the presses.
And then another thing I noticed with this whole COVID thing, which is where we are right now, is one of the president's economic recovery task force advisors, Stephen Moore, recently put out an article where he thinks that we should do a way with income tax and basically just make it a full blown sales tax. Texas and Florida, and there's probably four or five other states that follow this logic where they don't have income tax. And so based on his analysis, he says, the reason that he thinks this would be successful is because these states that are already implementing no income tax like Florida and Texas they are deemed high gross states. They don't usually have an issue with growing the economy within their state.
And he feels that this is a reason. And they offset that income tax difference with the sales tax. And I thought that was really interesting because I mean we would probably increase our sales taxes and things would just get a little more complicated from my perspective. But I just wanted to give you a couple of things that are happening right now.
And with that, I turn it over to Dennis.
Dennis Downing:Well, in case anybody forgot who I was, my name's Dennis Downing. I have over 25 years of sales tax experience with audit, reverse audit, transactional questions, and matrices. I'm going to tell you a little about reverse audits. And I will try to get to the third polling question rather quickly, so everybody gets credit for today's training session. A reverse audit is simply looking at overpayments of sales and use tax the client is paying to vendors or the state.
Sales tax overpayments happen when the vendor charges the client tax on purchases, they make an error. This could be a result of the client unaware of potential exemptions or not rendering the proper certificate. The states have gotten a lot tougher auditing the certificates. So when a vendor accepts one if it's not filled out properly, it is not accepted and therefore it is taxable. These tax overpayments happens when clients are honestly accrue use tax on purchases, which should be exempt and self-remit the state to tax. For example, this usually happens where the client does not have a sales use tax matrices to guide them.
Benefits to the client, identify tax overpayments, especially a good time for reverse audits from companies looking for cash. Especially with COVID-19, reversal audits are almost done on a contingency basis. So that does not cost the company anything unless they receive a refund. Obtain cash refunds and credits for open periods. It's usually extent for the period for refunds. Usually the statute is three years, but an audit can ongoing to last five or for big corporations maybe even longer.
Help offset in audit assessment. The interest on the audit assessment is always much higher than refund interest. Usually the best time to do a reverse audit at a client is when the client is being audited. Utilize savings to fund other tax department activities. Usually the refund is given to the department where the refund is found advertising and marketing or the IT department. Improve effectiveness and quality. Apply positions on future returns or future audits. You do this in a way to reduce audit assessments. Reduce time on audit, example, you know what is taxable if you do the overpayment study and this way you could expedite the audit.
Identify triggered events that require future analysis and planning. That would be like when a company buys another business, they have to know the state sales tax laws for the business, the purchasing, and all the rules that apply to it. Improve controls, improve ability to mitigate the task. One way may uncover the certain underpayments during the review and you point them out to the clients. Two, improve compliance supported by necessary controls. And three, proactive management of state audit acknowledge overpayments to limit the audit assessments.
The next slide, how reverse audits are performed. You review the company's activities and business operations. Two, you review the trial balances or chart of accounts. I prefer trial balance because you only choose the accounts where you have activity. When you use just the chart of accounts, you could pick a lot of accounts and you could have looked very little data and it could take longer to run such work report.
Select certain accounts that have favorable exemptions. Depending on the state, the accounts could vary. You sample invoices from the accounts that you selected. You get a good idea about the refund claim. But a small number of vendors sell all different types of items to the client, then you can't go with a sample because would need a much larger example of invoices. All the invoices that will go into the claim, some states will accept a sample of invoices and some states say, "No, we want every invoice that's in your claim."
Put the claim together. Sometimes the clients like to review the claim, but my experience is that they like to view the claim when it's settled, so they review the final results. Be careful though, some states have penalties for claims where 50% of the claim is no good. For example, Wisconsin, basically the state looks at it this way, you file a claim, if you have bogus or erroneously stuff that you should have known aren't taxable, you don't have any law or reg to support your issue, then certain states will hit you with a 25% penalty claim on filing a bad refund. For example, Wisconsin would be one of the states that does that.
There are some firms that throw everything against the wall and sees what sticks. That might've been fine in the early 2000s, but as refunds get more and more quantitatively with each state, they don't want to waste time on erroneously bad claims. And with that, if the first 20 invoices are no good, the auditor can say, "Well, I'm going to basically deny the whole claim." Defend the claim, answer the questions the state or the auditor might have, or get additional proof to verify your claim.
Clients may receive the refund credit or an offset. Make recommendations to a client to fix their systems going forward. Some clients I've had don't like to fix it because they know they have the refund when the auditors come in the next time.
Next slide, exemptions for retailers. One of them is advertising, including direct mail. I did a company that could use tax on their advertising into newspapers. They filed in several states and several states have an exemption for newspapers, which then would mean the advertising supplement would be exempt for sales tax.
The only portion for those states that would be taxable are supplements that went to the stores. In states that do tax supplements as part of the newspapers, we determined the logistics cost was not taxable in most of the states and we received the refund on logistic costs. This project resulted in a $60 million refund for the 44 states where they filed. Capital improvements. Well, you must meet all three of the following conditions; substantially add value to the real property, or appreciably prolongs the useful life of the real property.
Two, it becomes part of the real property or permanently affixed to the real property so that removal would cause material damage. And three, is intended to become permanent installation. For example, a new HVAC system, new stairs, new structures, new electrical, rewiring of buildings. Anything you put in a claim that falls on the cap improvement, this is a gray area, and it's always has to be negotiated out with the auditor for the refund claim.
Bad debts or uncollected accounts. Most retailers know about this refund and of this refund possibility. Four, packaging; so twine, band, ropes, bubble wrap, cartons, wrapping paper, and other items would be exempt, but you have to check the state for the specific rules that law allows. Exemptions for manufacturers, machinery and equipment or other materials consume directly and predominantly. This is usually a 50% test using the manufacturing process that you would qualify for.
The best way to do a reverse audit under manufacturer is to do a plant tour. This way you know when the manufacturing process starts and end. The client could have a different way in their head where the process begins and ends, which could be outside of law and then law construes narrowly. By doing a plant tour, you can also see physically the machinery, and equipment, and the computers, and other supplies that are used in the process. Plant tours also give you an advantage over the state auditors who do not take the plant tour because you will know where process begins and ends.
Also, if an auditor takes it, you also are in good shape because you know what items are in the manufacturing process and therefore the auditor doesn't have the advantage. Also, you'll have to interview certain plant personnel that the auditor want to talk to because in my experience, if you do not prep the plant personnel, then they could say something to the auditor and he could lose items off your refund claim. An example of items use in manufacturing process would be forklifts. You could use it 60% of the time in manufacturing process, 40% of the time in the warehouse. The forklift is qualified because it would be the 50% of greater test.
Computer software delivered or accessed electronically, computers and software used in manufacturing process, packaging supplies. Pennsylvania exempt certain packaging equipment, pollution control, and cycling equipment. In New York balers can be considered recycling equipment and are exempt if there is a recycling income account to prove they're manufacturing something for sale. Utilities, just manufacturer processes using what's called a low-hanging fruit capital improvements in New York and New Jersey or improvement to really in other states on track to pay tax on the materials, but it's labor that could be exempt.
Exemption for financial service entities. Advertising, and direct mail, certain forms, and reports are exempt like 10-Ks, 10-Qs perspectives, office circulars, and etc. We covered capital improvements before. Data centers; computer systems, hardware, such as routers and servers, pre-written computer software, storage, racks, and cages for computer equipment, climate controlled such as AC and air filtration systems, vapor barriers, power generators, fiber optics, and cables, and also the sprinkler system that works with fire suppression equipment.
Services exempt when using data center include installation, maintaining, and servicing tangible or real property. New Jersey does not have this exemption. Sourcing of services. A New York company pays tax on information services for the companies. You get a refund by saying, "Okay, taking the users that are in New York versus the users across the country, come up with a percentage in tax and only pay that percentage of the tax.
Exemptions for life sciences companies. It's mostly all considered got to do with research and development, but there's only one cautionary tale I would tell you. I did an R&D company up the years ago, they handed out R&D certificates for everything they bought. That means furniture, theaters equipment that we used an administrative persist. Make sure you use R&D certificates exactly what you post to be for R&D.
One item that company's still make mistake claiming issues in R&D is quality control. That exemption is not qualify in New York or New Jersey. The following items are used direct and prominent use, which means 50% on R&D purposes. And they are listed below. I see we're running out of time. Exemptions for insurance entities. Well, I really should include insurance entities and financial industries on the same slide because as you notice that all four of them have the same exemptions. Success stories have found money in retailers, manufacturers, financial industries, technology industries, and utility industries.
Finally, I should include this in the last slide, but number one, check the state rules for your exemptions, they will vary from state to state. Check the statute of limitations the state you are filing a refund in usually three or four years. But if you're under audit, you want to get copies of all the sign waivers, so you make sure when the period ends. And three check the rules, what documentation is needed for proper refund claim. These requirements vary from state to state.
For example, in Texas, on your spreadsheet, you have to break out the tax for every transaction for state tax, county tax, city tax, and MTA tax. If you do not do it that way, they ship you back your refund claim, and then you basically you could lose statute periods. Because in the time that they send it back to you, you sent it in, send it back to you and you send it back, you could lose three to six months. So that's just my warning. And with that, is there any questions or anything for Andrea or myself?