Best practices, compliance tips for managing exemption certificates

What is an "exemption"?

In sales tax, it can be one of your best friends, documented proof that you’ve been compliant in complex sales tax obligations to charge or not charge sales tax appropriately. So they’re important to your sales tax obligations – as is verifying and maintaining them.

Certificates differ

A sales tax exemption is an exception that eliminates the need to charge sales tax on otherwise taxable transactions. The purchaser is responsible for issuing a valid exemption certificate. The seller should perform a reasonable/good faith level of review when accepting.

These documents may perform essentially the same function, but they still come in many different forms. Some are custom forms (sometimes even made to specifics by the customer themselves) Some are-state issued or come in a template issued by a state. Others are multi-jurisdictional forms that cover resale across many jurisdictions; others are designed to work with the Streamlined Sales Tax (SST) system.

The most common exemption certificate is a resale exemption certificate (aka a resale certificate). In the absence of a valid resale certificate, an auditor is likely to assume the transaction was taxable. The overall concept is that sales tax is imposed on the end-user of an item. It is presumed that all sales of tangible personal property are taxable unless specifically enumerated.

But exemptions apply to scenarios where the product, service or transaction is otherwise subject to sales and use tax but for which there is now 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.

Among other points:

• There are also differences between sale tax “exemptions” and “exclusions.”
  • An “exemption certificate” temporarily removes sales tax for specific buyers and uses.
  • An “exclusion” means the item is never taxed and no certificate is needed.
• Some certificates never expire; others expire after 1, 3, 4, 5 or 10 years. States’ exemption certificates also change frequently, and “evergreen” ones should be updated at least every three to five years.

Protect yourself step by step

1. Learn who might be exempt. Different purchasers may be granted exemptions under a state’s statutes, and exempt buyers can include the federal government; some state and local governments and government contractors; schools; churches; non-profit hospitals; and charities.
   
   
2. Get that certificate and read it before you accept it. A certificate typically includes the buyer’s sales tax ID, a date, a signature and the reason for claiming the exemption (depending on the state, additional information may also be required. Buyers have a window, often 90 days, to produce their certificate, but get it in your files ASAP. And allow customers to submit the certificate any way they want – paper, email, phone and so on. You’ll get more certificates.
   
   
3. Watch for validity. We discussed expiration dates. Among different types of resale certificates, a Uniform Sales and Use Tax Certificate can be used for resale exemptions in many states, with some limitations; the SST form works in states that participate in the project. Manufacturers’ certificates and a nonprofit certificate might also be acceptable.
   
   
4. Doublecheck state and buyer. Individual states issue specific resale certificates and some allow client-created certificates. Check the accuracy of a buyer’s certificate number and that a permit hasn’t expired. Most (but not all) state departments of taxation or revenue have online services to verify a certificate’s validity through a search. Some state tax/revenue departments you’ll have to call, and on some states’ sites you have to enter your own ID number as well as the purchaser’s. A few states instruct you to just accept the certificate in good faith.
   
   
5. Systematize. Review your files regularly to keep tabs on your certificates’ validity by state and by customer (either manually or via an automated process like the TaxConnex managed service). Also need to determine if you’re missing any certificates and that your on-file certificates exactly match the transactions you claimed as exempt.

Never put your certificate management on auto-pilot.

Contact us to find out if your business could be impacted by resale and exemption certificates and to gain a better understanding of this burden of sales tax compliance. You can also see our exemption certificate infographic.