Banks: Don’t overpay software license sales and use taxes


States may refund excess tax payments


As investments in technology continue to increase, banks and financial institutions that aren’t carefully examining the sales and use taxes on their software licenses may be missing out on substantial savings — and they may have an opportunity to secure a refund if they have overpaid.


“Identifying savings opportunities is especially important in the current high-rate environment where banks continue to face increased margin pressures,” said Graham Tasman, Grant Thornton Banking Industry Principal.


It’s no secret that companies are ramping up their investment in IT and technology faster than ever before. In Grant Thornton’s CFO survey for the second quarter of 2024, 64% of CFOs indicated they plan to increase their technology/IT spend, up from 55% in Q1.


For banking institutions, those investments appear to be growing at an even faster rate. Many banks and financial services companies purchase firmwide enterprise software and SaaS applications such as Microsoft, Oracle and SAP, as well as IT, digital and information services such as Nielsen, S&P Global and Morningstar. According to research from Arizent, 75% of banks said they plan to increase their technology spend in 2024.


But with significant technology spend comes equally significant tax implications, particularly in the form of sales and use taxes.  




The cost of sales and use tax overpayment


Frequently, when banks purchase licenses for software and IT services, sales or use tax is paid on the full value of the software licenses, even when the products are used in multiple states or countries outside of the state where the bank is headquartered, leading to instances of overpayment. Depending on the state where the company is domiciled, that overpayment could amount to hundreds of thousands of dollars or more.


“Say you’re headquartered in a high-tax jurisdiction where the sales tax rate is 9%. You’re spending $10 million a month on software. That will add up to $900,000,” explained Matthew DiDonato, Grant Thornton Managing Principal for Metro New York. “But if in reality only 25% of your staff are using the software in the state where you’re headquartered, you’ve effectively overpaid the other 75% of that $900,000 to that state.”


While tax exemptions exist for software purchases, banks often face challenges with certain jurisdictions that do not accept exemption certifications from purchasers wishing to allocate tax based on where the IT or software will be used. Instead, they can seek overpayment refunds and appropriately administer the tax in the jurisdictions where they’re going to use the software. Use tax is often paid at a lower rate in jurisdictions outside the state where the organization is headquartered. In some cases, the use tax rate could be as low as zero if the bank is exempt in a jurisdiction.


“If the company’s state allows for apportionment of IT transaction costs based on user locations, a potential refund may be available within the statute of limitations period, which is usually three to four years,” said Michael Cronin, Grant Thornton Tax Services Principal.


Specifically, banks headquartered in Maryland, Massachusetts, New York, Ohio, Pennsylvania, Texas, Utah or Washington could benefit from seeking refunds from overpayment on sales and use tax on these purchases as well as prospective tax savings.




Identify cost savings with cross-departmental collaboration


Identifying opportunities for software and IT purchase refunds can begin outside the tax department. Procurement and purchasing teams responsible for processing invoices have the potential to spot abnormalities in spend and identify possible refunds.


“Tax training and guidance is not often given to purchasing and procurement teams. As invoices come in, they may not be looking for anomalies,” Cronin said. “When entering a new IT contract, for example, teams should be thinking about how to approach a transaction in the most tax-effective way.”

Headshot of Michael Cronin

"Teams should be trained on tracking invoices closely to ensure accurate documentation of software usage across multiple jurisdictions and identify purchases that may qualify for refunds.” 

Michael Cronin

Grant Thornton Tax Services Principal


While this knowledge is typically housed in the tax department, the purchasing and procurement teams should still have a basic understanding and training on these issues so that they know what to look for.


“Teams should be trained on tracking invoices closely to ensure accurate documentation of software usage across multiple jurisdictions and identify purchases that may qualify for refunds,” Cronin said.


Banks should also have processes in place to optimize efficiency when seeking refunds, requiring collaboration between accounts payable, procurement, IT and tax departments.


“During the refund claims process, states will typically ask for documentation of user locations and how they’re using the technology, but the tax team may not be able to provide that information on its own,” Cronin said. “The tax, procurement and IT teams will need to work together to organize and share that information.”




Use technology to optimize tax management


Advancements in technology can significantly enhance banks’ tax management and compliance. Tools such as Power BI and Alteryx dashboards can help automate processes to manage and analyze data efficiently.


“Being able to capture and analyze data quickly can help teams identify anomalies,” DiDonato said. “For instance, if monthly purchases are $10 million with an average blended sales tax rate of 6%, any significant deviations can be flagged for further investigation by the tax team.”


Upgraded technology and automation capabilities are also beneficial during the refund claims process, allowing teams to gather information more efficiently, respond to states’ inquiries quickly and obtain refunds faster.


Best practices for recovering sales and use tax refunds

  • Train non-tax personnel. Educate procurement, accounts payable and internal IT teams on the importance of tax implications in IT purchases.
  • Upgrade technology. Implement dashboards and other tools to track and manage purchases in real time and to gather and organize necessary refund substantiation documents.
  • Engage third-party advisers. Work with an outside party to navigate and expedite refund claims and provide support with cross-team communication and knowledge sharing. 


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