How to Manage Your Exemption Certificates Smoothly

If preparing, issuing, collecting, verifying, and storing exemption or resale certificates for exempt sales made in the US was not a daunting task previously, it most certainly is now. How a company manages these changes can have a positive effect on their state and local sales tax compliance as well as their profit margin, if done well.

Ensure the certificate is completely filled out –

The seller’s name and address as well as the purchaser’s name and address, the purchaser’s state registration number(s) and any applicable expiration dates, the purchaser’s signature and date, description of items purchased, and description of the customer’s type of business must be on the certificate.

Verify the purchaser’s registration number -

Each state’s department of revenue has an avenue for the seller to verify if the purchaser’s resale certificate number is valid.  Most states now have an online verification system.

Keep the certificate on file -

If the seller gets audited, they are responsible for providing the resale certificate to the state to prove that sales tax was not required for a particular purchaser.

Make a judgement call -

It is up to the seller to question whether the buyer is truly purchasing for resale.  For example, if the buyer is purchasing office supplies but they are in the business of selling furniture, the resale certificate would not apply. The seller would need to charge the applicable sales tax.

Allyn’s 10 Basic Requirements for a Valid Exemption Certificate

• Seller's name and address
• Buyer's name and address
• Indication if this is a single-use or blanket resale certificate (if applicable)
• Business the 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. (If applicable)

Complexities

While a number of states accept a common, standard multi-jurisdictional exemption certificate, many states continue to utilize their own forms for resale and exemption certificates.

For example, the state of Florida issues a certificate that is valid and renewable annually, while other states have longer periods of validity. Numerous states provide that a certificate of exemption does not expire while others often have validity periods of 3, 4, 5, or 10 years. Some states allow certificates to be valid unless or until revoked. In Colorado, a certificate of exemption for contractors expires on the project end date listed on the certificate, whereas there is no expiration date for an organizational exemption license.

As validity periods differ from state to state, so does the acceptance of a home state’s exemption certificate for a multi-state transaction such as a drop shipment. Researching the nuances of the acceptance of exemption certificates not only for format and form but also for substance can be a cumbersome project requiring multi-state knowledge and expertise as well as ability to apply the statutes to the circumstances.

It is important to understand what is taxable in all the states in which you operate or make purchases and to know if any exemptions exist for your business and such items being purchased. Confirm your sales tax process and ensure your company is consistently reviewing both outgoing and incoming exemption certificates for validity and accuracy. 

Determine whether you have the manpower, expertise, and time to manage multi-state exemption certificate issuance and receipt offering 100% review of all certificates and consciously make the decision to select an expert resource who can manage the entire process for you and maximize your sales tax compliance while reducing your potential sales tax liabilities. Affirm that your company has the tools or software needed to electronically store certificates until needed for audit. Decide whether you can afford to overpay sales tax or whether you will take immediate actions to ensure compliance and seek tax savings opportunities.

Want More of This?

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. Our website is constantly updated with tax content designed to help your team function smoother. Visit us here

Our team posts regular updates on LinkedIn to keep you up to date in the indirect tax realm – follow us here!