A key document of sales & use tax is the exemption certificate.
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.
Definition – and danger
So what exactly is the meaning of an exemption certificate? Generally, an exemption is a statutory exception that eliminates the need to pay sales tax. The presumption is that all sales of tangible personal property are taxable unless specifically enumerated. Even though the statutes may clearly identify an exemption, you still have the burden of proof to support any untaxed sales.
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.
You go to Walmart, for example, to buy tangible personal property, Walmart charges you sales tax at the point of sale. When Walmart purchased that inventory, it did not pay sales tax on that inventory. Inventory for the purpose of resale is exempt from sales and use tax in all states that have a sales tax.
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.
According to the Sales Tax Institute, different purchasers may be granted exemptions under a state’s statutes. There are different types of exempt organizations. The Federal Government is an exempt organization, for instance, and sometimes so are state and local governments and government contractors.
States choose whether to tax non-profit organizations and charitable organizations. Examples of potentially exempt organizations are schools, churches, non-profit hospitals and charitable organizations.
States also have specific – and often differing – requirements for exemption certificates. In New York, for instance, you may use an exemption certificate if, as a purchaser, you intend to resell the property or service; intend to use the property or service for a purpose that is exempt from sales tax; or you make purchases as an agent or employee of tax-exempt nonprofit organizations or government entities. A purchaser must give the seller the properly completed certificate within 90 days of the time the sale is made, but preferably at the time of the sale.
In some cases, you must also have a valid Certificate of Authority to use an exemption certificate. Sales tax exemption certificates may also be issued and accepted electronically in York, and exemption certificates of other states are not valid to claim exemption from the state. Purchasers who routinely make similar purchases from a seller can also use a blanket certificate, which allows a purchaser to give a seller one exemption certificate to cover all similar purchases rather than a separate certificate for each purchase.
Sellers have the right to refuse a purchaser’s New York exemption certificate, in which case the seller must charge the purchaser sales tax.
Validating an Exemption Certificate
Exemption certificates for sales tax 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.
These forms should include a 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) and the customer signature and date. As a best practice, we recommend updating them from your customers every year although some certificates are valid for 2-3 years while 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.
The renewal period of exemption certificates varies by state and by type of exemption. Some states’ exemption certificates do not expire; others do expire within a set time.
With TaxConnex® exemption certificate management service, you’re able to outsource the process and gain easy access to all your certificates online. Contact us to find out if your business could be impacted by exemption certificates and to gain a better understanding of your burden of sales tax compliance.