There’s a lot of talk in sales tax about nexus, thresholds, forms, filing and many other details of compliance. One often overlooked aspect of compliance, but extremely important, is the sales tax exemption certificate.
An exemption certificate is used to exempt an otherwise taxable transaction from sales tax. The most common exemption certificate is a resale exemption certificate (aka a resale certificate).
If you can’t produce a valid resale certificate for a transaction with a buyer/customer, an auditor is likely to assume the transaction was taxable. It’s critical for you, the seller, to maintain copies of these resale certificates – and to make sure they’re correct. Validation of resale certificates is a piece of the compliance puzzle that you don’t want to skip.
‘Exempt’ from what?
The overall concept of these certificates is that all sales of tangible personal property are taxable unless specifically enumerated. Exemptions apply where the product, service or transaction is otherwise subject to sales and use tax but for which there is a legislated exemption.
The most common is a resale exemption where an item is purchased with the intent to sell the same item to another consumer or business. Let’s say you go to the store to buy an item. That store charges you sales tax at the point of sale. If the store is not the original manufacturer of the item, then they purchased that inventory, and they did not pay sales tax on it. The sales tax burden was passed on to you (the consumer). They purchased the item for resale and likely provided a resale exemption certificate to their vendor/supplier.
Another type of exemption could be based on the type of customer you sell to. In many situations, but not all, schools, government offices, churches, etc… are exempt from sales tax on specific purchases. Though they are exempt, they still must provide an exemption certificate to prove that the sale did not require sales tax. In the absence of an exemption certificate, the seller is required to collect and remit the applicable sales tax.
Exemption certificates should include a registration/account number, the customer’s and seller’s name, the nature of the exemption (resale, manufacturing, etc.) and the customer signature and date.
Trust but verify
If someone buys from you and they claim that the item is for resale, you must exercise “good faith” in accepting the exemption certificate. This includes reviewing the certificate for completeness (states’ Departments of Revenue can help you with what’s needed for a certificate in a given state).
Your first obvious step is to check the basic details outlined above. The most common errors include missing or incorrect signatures; missing issue date; incorrect claim types; inaccurate (or even third-party) names or addresses; and sales tax ID information for the wrong state.
Exemption certificates also come in a lot of varieties. A Uniform Sales and Use Tax Certificate can be used for resale exemptions in many states, with some limitations; a streamlined sales tax form is good in states that participate in the Streamlined Sales Tax project; and manufacturers and nonprofits might have their own certificates, among other examples. Some states will also allow client-created certificates but may also require additional criteria.
As a best practice, we also recommend updating these certificates from your regular customers every year even though some certificates are valid for two or three years (others never expire). It’s also a good idea to request exemption certificates even in states where you don’t have nexus, as insurance against future audits.
One of the first requests from the auditor will be for you to provide copies of all exemption certificates, including resale certificates. Auditors typically examine a sample of your exemption certificates on file – but, should they find errors in that sample, multiply that across a full audit period. You may get lucky, of course, with the sample that they pick. Then again, you might not. Do your homework ahead of time and be sure all your certificates on file are in good order.
Exemption and resales certificates are just a portion of your responsibilities when it comes to sales tax obligations and compliance. With TaxConnex, we manage this for you. Contact us to gain a better understanding of your burden of sales tax compliance.