An exemption is an exception that eliminates the need to pay sales tax. The presumption is that all sales of tangible personal property are taxable unless specifically enumerated. The purchaser has the responsibility for determining whether a sale is exempt from tax. If the purchaser does not submit a valid exemption certificate to the business, the business must assess and collect the sales tax from the purchaser. The responsibility to determine the validity of the exemption certificate resides with the business. Without this exemption certificate, the state or jurisdiction in which you are registered will expect you to have collected sales tax.
Exemptions apply to scenarios where the product, service or transaction is otherwise subject to sales and use tax but for which there is now an exemption. The most common is a resale exemption.
How important are these certificates? During a sales tax audit, one of the first requests from the auditor will be for you to provide copies of all exemption certificates for any exemptions you have claimed on your returns. Thus, the general rule to collect and remit sales tax unless you have a valid exemption certificate.
A few missing certificates on your end can result in large assessments including penalties and interest.
Validating an Exemption Certificate
Exemption certificates 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;
- Streamlined sales tax form. Good in states that participate in the Streamlined Sales Tax project;
- A state-specific resale certificate and state-issued exemption certificates;
- A manufacturer’s certificate;
- A nonprofit certificate.
Some states will allow client-created certificates but may also require additional criteria.
A client created certificate must include:
- Registration/account number (every state issues one to a tax-exempt entity)
- The customer’s and seller’s name
- The nature of the exemption (resale, manufacturing and so on)
- Customer signature and date.
As a best practice, it is recommended to update certificates from your customers every year although some certificates are valid for 2-3 years and others never expire. It’s also a good idea to get one even in a state where you don’t have nexus, as insurance against future audits.
Understanding all the aspects of sales tax is complex. The ability to outsource to an expert can save you and your team time, money and stress. Contact us to learn more about exemption certificates and maintaining your sales tax compliance.