An exemption certificate is one of the most useful tools that your online company has for sales tax.
This little piece of paper is used to exempt an otherwise taxable transaction from sales tax. The overall concept is that the end user incurs sales tax and that all sales of tangible personal property are taxable unless specifically enumerated, usually in legislation.
(Often certificates are for resale exemption, where an item is purchased with the intent to sell the same item to another consumer or business.)
The purchaser has the responsibility for determining whether a sale is exempt from tax. If the purchaser doesn’t submit a valid tax exemption certificate to your business, you must assess and collect the sales tax from the purchaser.
The responsibility to determine the validity of the exemption certificate, though, rests with you the business. Sans a valid exemption/resale certificate, an auditor examining your records one day might conclude that a transaction was taxable when you claim it wasn’t – and that you collected and remitted no sales tax on it.
An important piece of paper, obviously, and one you want in completely proper order.
Step by step
Learn who might be exempt. Different purchasers may be granted exemptions under a state’s statutes, and exempt buyers come in many different forms: the federal government; some state and local governments and government contractors; schools; churches; non-profit hospitals; and charities, for instance.
Get the certificate from your customer. And read it before you accept it. The resale 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 (even up front).
And allow customers to submit the certificate in the media they want – paper, email, phone and so on. You’ll get more certificates that way.
Watch for validity. Some certificates are valid for a set number of years; others never expire. 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 Streamlined Sales Tax form works in states that participate in the SST project. Manufacturers’ certificates and a nonprofit certificate might also be acceptable.
Doublecheck validity regarding 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, a form (sometimes from a vendor themselves), an inquiry or a simple click. Some states require entry of the buyer’s ID number of up to some 12 digits.
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.”
Make a system. 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).
You also need to determine if you’re missing any certificates, and be sure that your on-file certificates exactly match the transactions you claimed as exempt. Make this review the responsibility of one staffer or department in your company.
States’ exemption certificates also change frequently, and “evergreen” ones should be updated at least every three to five years. Keeping up with your exemption certificates is an ongoing process.
Exemption and resales certificates are key to your responsibilities when it comes to sales tax compliance. Contact us to find out if your business could be impacted by resale and exemption certificates and to gain a better understanding of your burden of sales tax compliance.
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