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Sales Tax Refunds on Software Under Scrutiny

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634 Sales Tax Refunds

Two cases currently pending before the Ohio Board of Tax Appeals highlight the need to provide sufficient documentation for software refunds and nontaxable positions, including satisfying Ohio Department of Taxation (“Department”) specific requirements for such claims.  Both cases involve refunds of sales tax paid on software for non-Ohio users.  One of the cases also considers the sufficiency of documentation for nontaxable services.

Hexion, Inc. v. McClain, BTA No. 2022-710, considers whether the taxpayer provided sufficient documentation for a refund of sales tax on software for non-Ohio users of such software, based on a multiple points of use (“MPU”) assertion.   The Department asserted that the taxpayer first tried to provide a user list based on prior years.   Upon receiving updated user lists, the Department appears to have refunded some sales tax.  However, the Department rejected updated user lists for other software where it asserted the lists were not specific to the software product for which a refund was claimed due to inconsistencies in the user list and the software contract.  That case also considered whether certain services are nontaxable.   A hearing has been held in this matter and the parties have to brief their positions.

KeyBank National Association v. Harris, BTA No. 2023-1133, also considers refunds for non-Ohio users of software.   As in Hexion, the taxpayer attempted to use prior user lists.    Upon receiving updated user lists, the Department issued some refunds but rejected other user lists as not aligning with the specific software, similar to what it did in Hexion.  However, the taxpayer also failed to provide the underlying contracts and proof of payment.

The Department has specific documentation requirements that must be satisfied to obtain a refund or sustain a nontaxable position on audit due to MPU.   Taxpayers and practitioners should seek to provide that documentation with the refund claim or shortly thereafter to expedite a refund.

At ZHF, we have several former Department auditors and the former administrator of the Department’s Audit Division.  Those individuals also have years of experience at the firm securing expedited refunds on software and similar purchases.  Further, our legal personnel have significant audit, appeals, and litigation experience that often allows for expedited refunds and limits the need for litigation. Please reach out to Deb McGraw or any of our ZHF professionals to further discuss sales tax refunds and the contents of this post.

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