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3 Basics of Exemption Certificates
Exemption Certificates Introduction
To know if an exemption or resale certificate your business receives or issues is valid, it is essential to understand what this document entails. An exemption or resale certificate is a form or document issued by a business to ensure sales tax is not applied to their invoice when they intend to resell their purchase. Sales tax is not used on these purchases because the applicable sales tax will be used on the final sale of the exchanged tangible property. This practice ensures that states do not collect sales tax twice on the sale of the same property.
A resale certificate can be a very confusing process as these forms vary by state, and the required information to make these certificates valid will differ based on the state of issuance. Additionally, each state will dictate specific rules within their jurisdictions regarding the use of these resale or exemption certificates. The tips and details below will help a business or taxpayer ensure the exemption certificates they manage are valid and defendable under audit.
Determine the Applicable State
One of the first and most essential steps in exemption certificate management is confirming the state for which you need a certificate. The applicable state certificate you need depends on the destination of the product or where the possession of the tangible property is transferring to. A common mistake made during this process is a buyer providing a certificate based on their corporate location as opposed to the ship-to state listed on an invoice.
For example, if a business located in Florida (FL) places an order intended for resale with a supplier located in FL, the buyer will simply provide a copy of their FL resale certificate to be exempt from the FL tax. However, if the same FL business makes a purchase and lists a ship-to location in Georgia (GA), the sales tax rate will be determined based on the ship to zip code in GA. If the buyer intends to resell the products, they will need to provide the supplier with their GA resale certificate to be exempt from tax on the invoice. If the buyer were to give a copy of their FL resale certificate, the supplier would be unable to accept this for the purchase shipping to GA, and the GA tax will still be applicable on the invoice until the buyer has provided the correct form.
Choose the Correct Form
Once the destination state is determined, the taxpayer will need to decide what form to provide a seller. The decision becomes difficult as there are state-specific resale certificates in addition to multi-jurisdictional forms that can be accepted. It is important to understand what each state will receive as a valid certificate. If a seller were to receive an incorrect form, exempt the buyer from tax and come under audit, the seller would need to ensure they can defend the certificates they have on file.
Therefore, when a seller accepts a certificate from a buyer, it is imperative to validate the document and understand if the state in question considers the form provided a valid resale certificate. Each state's Department of Revenue (DOR) website provides blank versions of their state certificate along with instructions for completing the form. If a business does not have a dedicated tax department or tax provider, the DOR is one of the best resources for exemption certificate details.
It is important to note individual states do not offer a fillable form option. States like Florida, Washington, and Louisiana will automatically issue state-provided resale certificates based on a business' active registration to collect and remit sales tax to that particular jurisdiction.
In addition to the state certificates and multi-jurisdictional forms, companies may provide suppliers with a direct pay permit, which is used when the buyer does not know the ultimate use of the purchase. This permit authorizes the permit holder to self-accrue and pay the applicable sales tax directly to the state once the final use of the purchase is determined. These permits are issued directly from the state once specific requirements and documentation are provided from the business.
A common error with form selection deals with buyers incorrectly providing a copy of their sales tax permit or license instead of a valid resale or exemption certificate. If this occurs, a seller must determine if this is an acceptable resale or exemption certificate. For example, the state of Mississippi will issue retail sales tax permits, and the permit will exclusively note "the permit holder may purchase materials or services for resale exempt from tax." However, if the state in question does not exempt tax based on a buyer providing a copy of their sales tax permit, the seller will need to obtain the correct certificate in order to proceed with processing the sale without tax applied.
Provide All Required Information
Two of the biggest hurdles to exemption certificates are completed once the purchaser determines the destination state and applicable resale certificate. If a state-generated form is needed (Florida or Washington), it is typically located in the business' online sales tax account with the state, and can be provided directly to the seller without any additional information or signature needed from the buyer.
If it is determined a fillable form will need to be completed by the buyer, the details listed below will be typical requirements to ensure a certificate is valid and accepted by the seller. If any of this information is missing or incorrectly entered when the completed certificate is received, the seller will not accept this as a valid resale certificate and ask for a corrected form before they can exempt any purchase from tax.
- Seller's name and address
- Buyer's name and address
- Indication if this is a single-use or blanket resale certificate
- Business buyer is engaged in (wholesaler, retailer, manufacturer, etc.)
- General description of business activities (ex: manufacturer of computers)
- General description of tangible property purchased for resale (ex: parts to be resold)
- Reason for exemption (ex: resale, manufacturing, research and development)
- Buyer's state sales tax registration or permit number
- Signature, title of party signing, date and/or effective date
- Acknowledgment from the buyer stating if any purchase exempted from tax is used or consumed within the normal course of business, tax will be paid directly to the applicable taxing jurisdiction.
Once a resale certificate containing the above information is provided to a seller from a buyer, it should be accepted in good faith by the seller to provide proof to the applicable taxing jurisdiction the purchase will be resold or is being used for exempt purposes. This certificate will then need to be held by the seller as support in the event of an audit to identify why sales tax was not added to an otherwise taxable purchase.
Tips for the Taxpayer
Exemption and resale certificates can be complicated and very complex as requirements and forms vary from state to state as well as what types of transactions qualify for exemptions. Following the information and tips outlined in this article will ensure the certificates you issue to sellers or receive from buyers will be valid in the event of an audit. It is extremely important to have these documents on file as this will explain why you did not pay or collect sales tax. If these certificates are not available, you will be unable to explain reasoning behind sales tax exclusions which can result in tax liabilities, penalties and interest. Maintaining current and complete exemption certificates is a crucial part of sales tax compliance. Receiving guidance from a sales tax professional can help ensure your business is compliant with rules and regulations regarding exemption or resale certificates.
How Can We Help?
Allyn's tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.
Allyn files state sales tax returns in every US taxing jurisdiction as well as manages exemption and resale certificates in every applicable state. Allyn Tax offers a web-based software that electronically stores exemption certificates and key certificate data. Allyn's tax team reviews certificates for validity and accuracy upon receipt before they are electronically stored for compliance and audit defense. With our in-house software, Allyn can proactively request updated certificates before an expiration date has been reached. Our customers also have 24/7 access to our web-based software to retrieve any stored certificates for their business needs. In addition to storing certificates, Allyn Tax has experience in issuing exemption and resale certificates for every US state as well as evaluating the taxability of requests by suppliers for these certificates.
Contact us and we can provide a customized cost-effective solution to meet your company's needs. For further information on Allyn Tax services, please contact: firstname.lastname@example.org.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News & Publications at www.allynintl.com.
Contributor: Mehgan O'Hehir
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn's regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, PR China, Prague, Czech Republic, and Dubai, UAE. For more information, visit www.allynintl.com.