Sales & Use Tax Recovery Success Story

A long-time financial services client asked Jefferson Wells to perform an independent evaluation of their ERM program.

Two people in safety vests stand beneath wind turbine

Business Issue 

The company, a Fortune 500 electric utility company was engaged in the generation, transmission, and distribution of electricity to over 6 million customers in the Midwest and Mid-Atlantic regions. The company had electricity generation capacity in excess of 16,000 megawatts, 24,000 miles of transmission lines and 269,000 miles of distribution lines. The sales and use tax consequences of tangible personal property and services purchased by the company has significant impact to its operations. The Client’s objective was to recover any sales and use tax paid on purchases that were exempt from tax for the period open to the statute of limitations. In addition, based on the findings to make recommendations to revise the tax payment and accrual procedures to prevent overpayments in the future. 

The Client realized that the overpayment of sales and use tax was an inherent problem due to: states different taxing schemes, an outdated and inefficient tax determination process, expansion through acquisitions and a general lack of knowledge regarding sales and use tax by persons responsible for compliance. 

The payment of sales and use tax was a key function of the purchasing and tax departments and impacted the company’s financial statements. Any savings would positively impact the company’s profitability as well as the business units. 

 

Solution 

The Client engaged Jefferson Wells to recover sales and use tax paid in error. To that end Jefferson Wells reviewed source documents, vendor contracts, tax paid to vendors and use tax accrued to identify sales and use tax paid on exempt or non-taxable items. The review also identified gaps in the process and provided recommendations to prevent the overpayments from occurring in the future.  


Results 

Jefferson Wells recovered in excess of $5 million in overpayments of sales and use tax improperly paid on purchases over an 8-year period. The overpayments recovered were due to the remittance of sales and use tax on: 

  • Exempt items such as property used in the rendition of a public utility service or property directly used in the manufacturing of electricity 
  • Non-taxable items such as engineering, consulting, landscaping, and construction services 
  • Items used out-of-state from where the tax was remitted such as Ohio use tax paid on items shipped and used in Pennsylvania 
  • Items purchased for resale 
  • Items which taxable percentage may be applied such as computer software, software as a service and transaction containing both taxable and exempt items
  • Items where sales tax was paid to the vendor and use tax accrued on the same transaction 

Through a review of Client’s books and records, Jefferson Wells was able to recover the sales and use tax overpayments by filing refund claims with a taxing jurisdiction or the client’s vendors. Jefferson Wells provided a schedule and supporting detail to the Client and discussed whether to move forward with each refund claim. Jefferson Wells addressed any questions or concerns posed by an auditor or vendor to substantiate the transactions in the refund claim. 

Over the course of the engagement Jefferson Wells was re-engaged to continue the review. Although Jefferson Wells identified gaps in the process and recommended changes the Client was unable to make process or infrastructure changes due to financial and resource limitations. Jefferson Wells has provided recovery services to the client over 8 years.