Exemption Certificate Background Information

Any time a company sells taxable goods to another company, it is required to collect sales tax unless the purchaser claims an exemption. Depending upon the State in which the exemption is going to apply, various types of exemption certificates may exist, i.e., Direct Pay Certificate Holder, Multistate exemption certificate, etc. The most common exemption is when a purchaser buys a product that it will turn around and resell. In order to comply with state laws, a seller must demand a properly completed exemption or resale certificate as evidence of why it did not charge tax.

When a company is audited by a state, the auditor will request to see exemption documentation for a sampling of transactions. If the company being audited cannot produce the documentation, or the documentation they have is not properly completed or is outdated, then the company being audited will be responsible for paying the tax.

As states continue to seek new revenue sources in the current economic environment, many are taking a much more aggressive approach in analyzing companies' tax exemption and resale certificates. An invalid or outdated tax exemption or resale certificate is considered "low-hanging fruit" for a tax auditor. Once identified, these errors can be projected over the entire sample period and lead to thousands of dollars in audit assessments.

Either in conjunction with a tax audit, or as a standalone project, TaxAutomation can review your company's sales and use tax resale and exemption certificates for compliance with the various state requirements. Projects could be targeted to states you expect to audit your company in the near future.

Are you aware that 10 states now have expiration dates for some or all of their tax exemption documentation, which range anywhere from 10 years to 1 year? Are you aware which states allow for use of the Multi-jurisdictional certificate? Did you know that several states have recently changed their numbering system and may no longer recognize sales tax exemption certificates with old registration numbers?

Consider the state of Florida. Under Florida law (§212.07(1)(b), Florida Statutes), a resale certificate must be renewed annually unless a vendor makes "recurring sales to a purchaser in the normal course of business on a continual basis." Purchases are considered to be made on a "continual basis" only if sales to a particular purchaser are made no less frequently than once every 12-month period. Thus, hypothetically, a resale certificate accepted from a customer who thereafter makes one purchase every 11 months would continue to be valid in perpetuity. However, if that same customer only made a purchase every 13 months, its resale certificate would be invalid after the first sale.

A review of one Fortune 500 company's certificates revealed a greater than 25% error ratio (see case study - http://www.taxautomation.com/taxexmpt_casestudy.pdf.) Errors range from expired certificates to unsigned sales tax exemption certificates to certificates that simply don't identify what is being purchased under the exemption. The potential cost savings are clear, as are the risks for not having valid documentation.

Copyright 2002 TaxAutomation Inc.