Fueling Up Truck

Don’t pay more than what you owe in state taxes. Fuel excise tax exemptions and reverse sales tax audits often mean refunds for trucking companies.

Tax strategies

Fuel Tax Exemption and Reverse Audit Can Save Minnesota Truckers Big Money

  • Andy Bollman
  • 8/23/2017

If your trucking company is looking for ways to increase cash flow, you will want to take advantage of state sales tax exemptions and refund opportunities. Tax payments can add up to sizeable expenses, and curbing what you owe can keep more cash in your business. For trucking operations in Minnesota (and other states, too), there are two ways you can cut into your state tax bills: claiming fuel excise tax exemptions and performing a reverse sales tax audit.

Fuel excise tax exemption can mean a tax refund

Look first to the Minnesota omnibus tax bill that Governor Mark Dayton signed on May 30. One of the provisions of the bill exempts fuel sold and purchased after June 30, 2017, from fuel excise and sales tax if the fuel is used for the following:

  • To operate power take-off units, auxiliary engines, and refrigeration units, if they are part of a licensed motor vehicle
  • To power an unlicensed motor vehicle used to move semitrailers within a cargo yard, warehouse facility, or intermodal facility

In the past, fuel purchased for these activities was eligible for a fuel excise tax refund. However, if a company elected to file for the refund, Minnesota then required that sales tax be paid on the purchase. The break-even point had to be calculated to determine the benefit of claiming the refund because the excise tax was based on volume, and the sales tax was based on the purchase price of the fuel. This is an issue that the MTA had been fighting to change for years. It was instrumental in persuading the state legislature to finally get this approved.

The new law will allow companies to file refund claims for the fuel excise tax without having to subsequently pay sales tax. An example would be if your company operates 10 trucks, and each APU or reefer unit used 1,000 gallons of diesel per year, this new rule would put an additional $2,850 in your pocket (1,000 x $0.285 per gallon x 10). See the updated Minnesota Sales Tax Fact Sheet 116 for details.

In Minnesota, a refund claim is filed by submitting Minnesota Department of Revenue Form ST-11 Sales and Use Tax Refund Request with a schedule showing the purchases that qualify for a refund, along with a description of each purchase and the reason it qualifies for a refund.

Reverse sales tax audit prevents tax overpayment

State taxing authorities often audit trucking companies for underpayment of sales and use taxes. If you’ve ever been hit with a retroactive tax bill, you know that it can take a toll on your cash flow. But turnabout is fair play: There is such a thing as a reverse sales tax audit (reverse audit), and it does the exact opposite. A reverse audit helps your company identify sales tax overpayments you may have made so you can claim back what you erroneously paid to the government. It’s quite possible that the state (or several states) owes you a refund.

Why some trucking companies pay too much sales tax

Because trucking companies ply their trade across state borders, they grapple with a variety of different state tax regulations. All 50 of our states have different laws, with different degrees of complexity. Most states impose tax on the sale of tangible personal property and certain services, and vendors registered in the states where these sales are transacted are supposed to collect that tax. If they don’t, the purchaser is on the hook for accruing and remitting the corresponding use tax. Most companies don’t have the time and resources to review every invoice and check it for tax accuracy, so overpayments slip through the cracks.

Many states provide trucking-related sales tax exemptions. In Minnesota, for instance, there is a partial sales tax exemption on the purchase of trucks, trailers, and accessories and parts attached to trucks for companies whose motor vehicles incur mileage outside the state’s borders. But all too often, these types of exemptions aren’t claimed or granted simply because the company is unaware of them or vendors neglect to account for them. Overlooked exemptions can really add up, and leaving them on the table means costly overpayments.

How a reverse audit helps you get your money back

Tax laws are complicated. Your best course of action is to engage a qualified firm with reverse sales tax audit experience to help you make sense of the law and root out overpayments. In Minnesota, a reverse sales tax audit is completed in three phases: identifying and estimating potential refunds, validating and submitting overpayment claims, and remedying the overpayment causes.

  • Phase one — Feasibility study

    The first phase is a feasibility study to identify and estimate the potential sales and use tax refund opportunities. It takes about a day to review your fixed asset listing, chart of accounts, and accounts payable activity and invoices for all time periods within the statute of limitations. In Minnesota, this is three-and-a-half years. From this review, the sales tax professional performing the reverse sales tax audit can estimate your potential refund.

  • Phase two — Validation

    If an overpayment is identified in the feasibility phase, the primary focus is to compile the documentation required to prepare and submit the refund claim for the state’s review. This often involves meeting with the company personnel most familiar with the items purchased, such as plant supervisors or buyers, to help provide descriptions for the items being claimed. Summary explanations may also be required if the reason for the exemption would not be obvious to the state's claim reviewer. In the final step of phase two, the entire refund claim package is presented to the company for review and approval.
  • Phase three — Implementation

    Once the refund claim has been submitted to the state, the state representative may have questions and request copies of invoices. Phase three includes responding to the state's requests and working to ensure the refund is issued to and received by your company. It is important to provide training to company personnel and make sure a process is in place to capture the exemptions that resulted in the retroactive refunds.

Conduct a reverse audit anytime

Anytime is a good time to do a reverse audit. And because sales and use tax refund claims are common, filing a refund claim does not automatically trigger a state audit. It should be noted that a reverse sales tax audit can be performed in any state that imposes sales and use tax, following a process similar to the one described above for Minnesota. In our experience, we’ve seen that these reverse audits help small and large carriers alike. For example, we’ve recently worked with a 20-truck operation that received a $50,000 refund, and a 300-truck operation that received a $150,000 refund.

It’s important that your company follows tax collection processes properly and routinely, but when you consider the variety and complexity of state tax laws, along with the time limitations of your staff, it’s understandable that a reverse audit may be necessary to help you get your processes under control — and claim what is due back to you in overpayment.

How we can help

CLA’s trucking and transportation industry practitioners and state and local tax professionals can help you assess your tax obligations and claim any exemptions and refunds. If a reverse audit makes sense for your business, we can perform that for you, as well. State tax laws can be confusing and onerous, and professional guidance can be beneficial in understanding and complying with them — and keeping you from paying more than what you owe.