- Direct Pay Permits allow taxpayers to pay state taxes directly, leading to potential tax savings.
- Benefits & challenges of obtaining a direct pay permit highlight a significant local tax savings, balanced against stringent qualifications and regular audits.
- The Implementation process involves strategic vendor selection after acquiring a permit and leveraging expert assistance for compliance and audits
Shane: Hello and welcome to another edition of Weaver: Beyond the Numbers, I am Shane Stewart, partner-in-charge of our State and Local Tax practice at Weaver. I'm joined today by Mayur Naik and Tony Burgess. Mayur is a partner in our State and Local Tax practice and Tony is a senior manager in our State and Local Tax practice. We're calling this segment: Direct Pay, Don't Overpay!
Oftentimes we have conversations with our clients and taxpayers about the benefits and considerations, or requirements, for complying and utilizing direct pay.
So, Mayur, can you please explain to us what a direct pay is?
Mayur: A direct pay permit is a special permit with the state that allows the taxpayer to directly pay sales tax or use tax to that state instead of paying sales tax directly to their vendor.
Shane: What are the benefits for having a direct pay? What should companies think about?
Tony: There are several benefits from becoming a direct permit holder. The most important one is just getting control of your tax function, taking the responsibility away from your vendors and bringing it in-house. It helps you manage your exemptions much more efficiently. There's also potentially some local tax savings opportunities. So traditionally, if you're paying the full rate, like in Texas for example, you're paying the full state and local rate of eight and a quarter. And because that's based on your vendor's place of business, you can switch to your place of business, or where you're using the items, which oftentimes is in local jurisdictions that are less than 2%, so you would instantly get up to 2% savings because you're managing based on your location.
Mayur: Tony, I think right there is one of the biggest benefits to direct pay permit that could save the taxpayer millions and millions of dollars just on the local tax.
Tony: Yeah, and most of the time that is why taxpayers make the decision. It's because the cost of bringing it in-house and reporting it directly is less than the cost of complying with it. So, Yes, it essentially pays for itself in those cases.
Shane: Well, how easy is it once you have a direct pay to reap those benefits? I mean, it sounds pretty no brainer or simple. What is the process and what do taxpayers companies need to know?
Mayur: So, let's set the groundwork. Not every taxpayer qualifies for a direct pay permit. There are certain rules or facts that a company has to meet in order to get the permit, so you apply for it. Typically, they want to know if you have an established accounting system? Are you going to be capable of taking on this compliance burden and report that tax? Do you have the people? Do you have the resources? Do you have the decision making? Can you do all those things? And so if you can, yeah, it is almost a no brainer if you do have that local tax savings opportunity and that ownership of controlling the sales tax dollars flowing out of your company.
Shane: How do you use this direct pay permit? How do companies, once they have obtained it, if they've qualified, what do they do? Do they just hand the certificates to their vendors? What's the process about taking the thought process there?
Watch the video above to hear the rest of the conversation on the benefits of direct pay!