Navigating the Waters of Tax-Exempt Sales
Navigating the waters of tax-exempt sales and the proper documentation can be very tricky. Oftentimes the leading cause of large assessments in audits comes from missing or invalid sales and use tax exemption certificates. As a best practice, businesses should be collecting an exemption certificate prior to or at the point of sale.
When a certificate is collected at the point of sale and the seller has no reason to believe it is false, and it is on the correct form, and it is completely filled out, and it makes common sense, the seller is said to have accepted it in good faith. This is important because auditors can not generally do any digging into certificates that are accepted in good faith. In addition, if there are any issues that arise later, the state will generally go after the purchaser. However, if a certificate deviates from any of the above, the good faith acceptance is void, and the certificates are open to additional verification.
A great example to show how important it is to properly collect certificates before or at the time of purchase happened recently in Virginia, where in an audit of a manufacturer, the taxpayer failed to have proof of exemption certificates on file at the time of the transaction. The taxpayer ran into five different tax exemption issues that resulted in a large assessment:
The taxpayer could not show that the certificates were collected in good faith and were therefore open to further investigation and were the responsibility of the seller rather than the purchaser.
The seller did not determine that the seller was eligible for the exemption claimed.
The seller provided exemption certificates that were dated after the audit ended.
The seller provided certificates with no date listed and therefore did not meet the Virginia state code requirements.
Some of the purchasers were not registered at the time of the purchase and the date of the certificate, making them invalid.
Sales and use tax exemption rules and certificates vary from state to state and can oftentimes be a complex situation differing from purchaser to purchaser. Knowing the different state rules and forms is an essential part of handling tax-exempt transactions. You want to make sure you have met the requirements for a good faith acceptance so the state can’t come back on you. Missing, incomplete, or invalid certificates are a leading cause of large assessments in audits. Spending time learning the rules or outsourcing to a third party can save you a lot of heartache and money down the road. We have a great exemption certificate management program and would be happy to provide information on our services. Contact us here.
By: Austin Hanson
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.