Sales & Use Tax Reverse Audits – What Manufacturing CFOs Need to Know

What is a sales & use tax reverse audit?

In a standard audit, a state looks for underpayments; in a reverse audit, your team or an advisor looks for overpayments and missed exemptions.​

Key elements:

• Review 3–4 years of purchases and fixed assets for over‑taxed items.​

• Apply state‑specific rules and exemptions for manufacturing equipment, utilities, and production inputs.​

The result is a set of refund claims or credits supported by documentation and legal references.

Where manufacturers overpay

Typical overpayment areas include:

• Production equipment and parts – machines, replacement parts, and tooling that qualify for manufacturing exemptions but were taxed.​

• Utilities – electricity, gas, and other utilities used directly in manufacturing where predominant‑use or similar rules can reduce tax.​

• R&D and testing – qualifying R&D or quality‑control activities that may have exemption coverage but were treated as taxable.​

These issues arise because exemption rules vary by state, purchasing teams are busy, and invoices are coded under time pressure.​

How a reverse audit typically works

A typical manufacturing reverse audit follows a clear sequence:​

• Scoping – define which plants, states, and years are in scope based on spend and risk.

• Data gathering – extract AP, fixed‑asset, and utility data, focusing on high‑value and tax‑heavy categories.

• Review and sampling – apply rules to targeted samples, then expand where patterns of overpayment are found.

• Quantification – calculate potential refunds by invoice, vendor, and tax jurisdiction.

• Documentation – assemble schedules, copies of invoices, and exemption rationale to support refund claims.

The same work also strengthens your position for future state audits.

Benefits for the CFO and tax team

A reverse audit is not just about a one‑time check; it has ongoing value.

• Cash impact – refunds and credits that directly improve cash and effective tax rate.​

• Process improvement – visibility into where coding, exemption handling, or vendor behavior need tightening.​

• Audit readiness – better documentation and understanding of your tax profile before the state comes calling.​

For many manufacturers, a well‑executed reverse audit can produce six‑ or seven‑figure recoveries while giving finance and tax clearer control over indirect tax.