A direct pay permit is one option available to manufacturers to make their sales & use tax compliance a little easier. It’s a special exemption certificate issued by the DOR to allow manufacturers to purchase everything exempt from sales tax. Then, all tax due is paid by the manufacturer as use tax. If you are considering the direct pay permit option, there are important issues to consider:
Benefits of Direct Pay Permits:
- You, not your vendor, control which transactions are taxed. No more worries if the vendor is correctly charging you tax or not charging tax. Cutting your supplier out of the equation of your tax compliance eliminates one extra layer of potential problems.
- You can determine taxability of items at the time of use, not the time of purchase. This is especially helpful to manufacturers because they often may be purchasing items in which taxability is determined by use, and how items will be used is often unknown at the time of purchase.
- Better manage your tax compliance by being able to review all use tax paid at any time – just by looking at what was paid as use tax on your sales & use tax return. Comparatively, without a direct pay permit, it is often difficult to analyze total tax compliance because taxes paid to the vendor are usually not separately identified or tracked.
- If you happen to discover that taxes were paid in error, a simple adjustment can be made in your use tax accrual account. Conversely, if tax was paid to a supplier in error, it is challenging to reach out to the supplier to reverse the payment. Bottom line is you can save a significant amount of time and effort.
Important Facts about Direct Pay Permits:
- Not everyone qualifies. Specific industries can apply for a direct pay permit in all states but the District of Columbia, Hawaii and New Mexico. Specific requirements must be met in each state and these requirements vary from state to state.
- Audits are more frequent. The DOR routinely audits companies with direct pay permits to ensure all tax owed has been paid.
- Bonds may be required. A bond may be required to be filed before the state will issue a direct pay permit.
- Interest on refunds may not be available. Georgia is one state that will not pay interest on refunds issued due to overpayment of tax under a direct pay permit.
Direct Pay Permit - Top Recommendation:
To have success using a direct pay permit, training is essential. Everyone must understand what a Direct Pay Permit is and how it should be used. Furthermore, it is essential that the staff (usually accounting and purchasing) who are making sales and use tax decisions are well trained on the tax laws in their state. Reference charts, matrices, and tables are good first steps to assist the team making tax decisions.
Don’t hesitate to bring in sales tax experts who can provide in-depth training in this area. It’s a good investment and will help ensure that those responsible for making tax decision have the tools and information at their disposal to make accurate taxability determinations.
Also, a good use tax accrual system must be in place to make sure use tax is getting paid. Whether use tax is automated by material groups, G/L account numbers, or done manually on a transaction by transaction basis, a good system with a proper audit trail must be put into place.
One Final Note:
Sales and use tax can be complicated, and any opportunity to make it easier should be considered. As with any good process, a solid foundation needs to be in place to reap the full benefit. If you’re a manufacturer with a direct pay permit, what advice would you give to a company considering applying for the permit? Alternately - if you are a manufacturer with a Direct Pay Permit question - please send us your question using the REQUEST option referenced below.
Other recent “Manufacturing & Distribution” posts by Lauren Stinson, CMI:
- Direct Pay Permits for Manufacturers - Good Idea?
- Manufacturing Purchases: 5 Sales-Use Tax Basics for Purchasers and A/P
- Manufacturing Exemption Misconception: Everything is Tax Exempt!
- Manufacturers’ Utility Studies: 5 Approaches to Utility Exemptions
- Manufacturing Sales & Use Exemptions: Open to Interpretation