Allen Liebnick
Allen Liebnick
Think Outside the Box

Being creative in planning and asking the right questions can help you implement new tax and financial savings.

April 2, 2009
by Allen Liebnick, CPA

The ability is to think differently, unconventionally or from a new perspective. This phrase often refers to novel, creative and smart thinking. “To think outside the box is to eliminate false constraints when attempting to solve a problem” (from Wikipedia, the free encyclopedia).

In my last article, How Much Is Hiding in Your Company's Pockets?, I referred to six reasons why companies do not actively pursue overpayments.

  1. Assumption
  2. Closely held and closely watched company
  3. Not that much to recover
  4. Employees that have been retained will work twice as hard and be more diligent
  5. Let’s not make waves
  6. We don’t have the time or manpower

The above reasons are why companies do not pursue overpayments. On a different level, companies are unaware that there may be opportunities to recover overpayments because they are not “thinking outside the box.”

Thinking Outside the Box

Here’s a good example of thinking outside the box.

Example: A client purchased two existing high-rise buildings in a metropolitan city in Texas. The buildings were built in 1970 and were occupied until 1986. The same building had stood empty since 1986 to present due to asbestos problems. The cost of removing the asbestos was prohibitive, and the buildings’ original design was outdated in comparison to the new construction going on in the same area. The client decided to raze the buildings, taking them down to the ground. However, from the time the building was built to the time the client bought it, the zoning laws had changed. If the client had followed its original plan to take the buildings down to the ground, they would have been limited in size and would have had to rebuild much smaller buildings. Instead, the client decided to make them “see through” buildings, ripping everything out except the steel skeleton.

The Lone Star State’s Perspective

In Texas, there is a big difference between “new” construction and “remodeling” as far as sales tax exemptions are concerned. The labor used in “new” construction is not subject to sales tax while the labor for remodel is, which raises the question, was this “new” construction or “remodeling”?
Since the buildings were completely gutted, there was no doubt in anyone’s mind that this was remodeling since new construction in Texas means never before used square footage. Even though the buildings were reduced to steel skeletons, it was still considered remodeling since the total square footage had indeed been used in the past, albeit some 20 years ago. As a result, the client never challenged any part of the contractors’ invoices for sales tax charged on labor.

Thinking out of the box: It was obvious that the façade of the “new” building was far different from the façade of the original building. The new façade was glass enclosed and gave the impression of the buildings not only being more modern but also larger than the pictures of the original buildings. “Thinking outside the box” meant questioning the engineers and architects, NOT the financial people, as to just how the new façade was attached to the buildings. It turned out that the new façade required two-foot slab extensions that had to be added to the perimeter of all the floors, from top to bottom. This two-foot slab, on every floor and on every side of the buildings, created new square footage that no one had put their “foot print” on before. Since additional square footage was added to both buildings and to the roof, the client was able to establish that a portion of the contracts was for remodeling and a portion was for new construction as per the following definition. Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter O, Rule Sec. 3.357 (a)(5) New construction – “New construction also includes the addition of new footage to an existing structure.”

Using the engineers and the architects, it was determined just how much square-footage there was in the original buildings and how much square-footage there was in the newly-completed buildings. Surprisingly, the difference was only the new-square footage that no one had ever used. Through documentary evidence and statements by both the architectural and the engineering firms and by using this percentage — the new square-footage to the original total square-footage — allowed the client to establish what portion of the labor per the contracts was for remodeling versus new construction. The client was able to go back to the state and claim a substantial refund for taxes paid to its contractors for nontaxable labor on new construction.

Continuing to think outside the box and following the logic that the additional square-footage was indeed added to each building, then it followed that a portion of the labor for the finish-out work for tenants was also for new construction. Texas Administrative Code, Title 34, Part 1, Chapter 3, Subchapter O, Rule 3.357(a)(8). “New construction” is defined as, “All new improvements to real property including initial finish out work to the interior or the exterior of the improvement.”

Using the same percentage defined above, the client was able to establish what portion of the contractors’ labor was for remodeling and what portion was for nontaxable new construction labor. Again, this allowed the client to go back to the state for additional refunds.

Thinking outside the box doesn’t only mean being creative in planning and implementing new tax and financial savings. It also means having the ability to step back and recognize that opportunities for savings and recoveries may be overlooked if the right questions aren’t asked about some of the most mundane things, such as “how is that attached?”

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Allen M. Liebnick, CPA, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 15 years. He serves clients in the U.S., Canada and Mexico. He is a member of the New York State Society of CPAs as well as Texas Society of Certified Public Accountants.