Sales and use tax laws, rules and regulations can be complex and this is no different for companies who are exempt from sales tax on some purchases. States generally allow, under certain conditions, for normally taxed goods and services to be exempt of sales tax for specific customers. A business identifies itself as exempt from sales tax for specific purposes when it applies for a tax id number with the state.
Most states will allow customers who purchase taxable goods or services for resale to be tax exempt. An item purchased for resale cannot have tax applied to it twice: it must be applied at initial purchase or at resale. In addition to wholesalers and retailers, other entities that may qualify for exemptions are: federal, state or local government departments, tribal governments, foreign diplomats, charitable, non-profit or educational organizations and agricultural, industrial production or manufacturing companies.
According to the Streamlined Sales Tax group, purchasers are “…responsible for knowing if they qualify to claim exemption from tax in the state that would otherwise be due tax on this sale.” A purchaser will be held liable for taxes and interest should it be found that they are not eligible to claim the exemption.
Not only is the purchaser responsible for their part, but the seller may not accept a certificate if the state does not allow the exemption or the certificate is invalid. A seller must also ascertain that the certificate is appropriate and acceptable for the products being purchased. The misuse of a certificate is taken very seriously by most state governments and if misuse is discovered, then there can be fines, revoking of right to sell or make a certificate and even imprisonment.
What types of products may be purchased depends of the state rules and regulations, the type of business requesting the exemption and how the product will be used. Each state has specific laws governing how a product can be used in order to qualify for an exemption to the business.
For example, in one state, a manufacturing company may purchase a forklift for use in their manufacturing division, but if that forklift is used for another purpose, then that forklift is taxable. Likewise, if a vendor purchases cups intended to be used for sales of soda pop from their mobile vending truck, but they use some of them for a company party, then those cups become taxable and the business should remit a sales tax return paying sales/use tax on those items.
Sales and use tax compliance can be complicated and it is critical that each responsible party-the seller and the purchaser-ensure they know what requirements their state has regarding taxability and exempt status. It is important to note that each state has different requirements and will possibly require a separate form or additional information based on your exempt status. For example, if you have nexus-which could be determined by physical or business presence in a state-you will need to obtain certificates for each state or use a multi-state certificate, provided each state agrees to honor that certificate.
As mentioned earlier, when a business registers with a state where they will be doing business, they must identify their non-tax status with that state. The state provides them with a number to use in creation of exemption certificates with each seller they intend to purchase items from. A certificate can be created for a single purchase or as a blanket certificate to cover on-going purchases.
Each seller is set up in different ways to create and manage exemption certificates provided to them by customers. Each state may require more information, but the following must be provided:
- Name of purchaser and business address
- Purchaser tax id number, FEIN, Driver’s license or foreign diplomat number
- Seller’s name and address
- Type of business
- Reason for exemption
Although there are some standardized forms, some states may require additional information, so always check with the state regarding exemption certificate requirements.
The purchaser must know their tax ID number and what information to provide on an exemption certificate, but the seller must manage the information received from the purchaser and maintain a record of that certificate. If you are a business that does very few sales to tax-exempt purchasers, then your method of organizing and tracking non-taxed transactions may be fairly simple: A filing system, hard-copy certificates or scanned in copies, that are related to the transaction post-sale during accounting processes.
Should you have 50 or more certificates that you manage, you must ensure that you are tracking them and associate them with transactions so they don’t get lost. An auditor of the state will want to see the actual certificate-electronic or hard-copy-and then want to see what non-taxed transactions are associated with the certificate to ensure it has been applied correctly. You are also responsible to ensure that the certificate information is valid and not expired.
Once you get more than 100 or even 1,000 certificates, it begins to make sense to have an automated, “intelligent” method of managing exemption certificates. An automated system can provide you with features such as:
- Online collection (no hard-copy form required)
- Expiration date monitoring
- Digital storage and easy access and retrieval
- Transaction association
- Integration with your current ERP/billing and tax decision software for seamless functionality
Whether you are a purchaser or a seller, exemption certificates must comply with rules and regulations within the state you do business. If you think you qualify for purchasing items exempt from sales tax, contact your licensing agency in the states you feel you are exempt and ensure you have the correct information to create an exemption certificate for your purchases. If you are a seller, be sure that you understand what information is required and that the information is valid when you receive an exemption certificate.
Learn more about automating exemption certificates by downloading the FREE white paper “Automating the Exemption Certificate Lifecycle” at Avalara.com.
Susan McLain is a writer, blogger and marketing manager for Avalara, Inc., located on Bainbridge Island, Washington. Avalara is the leading provider of web-hosted sales and use tax management services. Susan has been a technical and marketing writer, project analyst, business analyst and more for over 15 years working with IT services, medical, legal and other high technology businesses.
About Avalara: Avalara’s mission is to provide end-to-end tax management solutions to businesses of all sizes and transform the sales, use and VAT tax process for customers with cost-effective state-of-the-art solutions. With its innovative, patented technology, Avalara helps companies from every industry eliminate the complexity of tax management by automating and providing accurate tax calculation, painless administration, effortless reporting and, timely remittance. Avalara provides FREE webinars about sales tax automation. Check us out at http://www.avalara.com.