Last week we introduced our series on Exemption Certificate Management with the Top 10 things you need to know about exemption certificates. This week we will delve further into our first topic:
DOTS – Depends On The State
The number one thing you need to understand about Exemption Certificate Management is that there are no global rules regarding exemption certificates. Each state has different regulations for which types of exemptions are in place as well as the process to document exemptions. But don’t lose faith. While there are no global rules, there are some general rules. With certificates, a little education and a little structure can go a long way. Since it Depends On The State, knowing which states you have nexus in is imperative. No need to research exemptions for states in which you are not required to collect sales tax and therefore not required to collect certificates.
There are various broad types of exemptions – resale, manufacturing, agricultural, government, non-profit/religious, telecommunication, etc. Each state grants a different set of exemption types as well as defines these types in different manners. This means that not every state has a manufacturing exemption at all and those that do define what qualifies as manufacturing in a unique way. If you are a multi-state seller, you are responsible for understanding what exemptions are available that are reasonable for the products you sell. For instance, if you sell automotive supplies, is it reasonable that they could be purchased under an agricultural exemption? Probably. Manufacturing? Probably. Government? Definitely. Construction contractor? Probably not.
Agricultural and manufacturing get a “probably” status because each state defines what qualifies for their exemptions (if they have agricultural and manufacturing exemptions) differently. For instance, some states only include production equipment in their manufacturing exemption, in which case miscellaneous supplies, like from an auto supplier, would not qualify. Yet other states allow for repair parts to production equipment to qualify which broadens drastically the types of items that fall under the exemption.
States also differ in their treatment of purchases by government, non-profits, and religious organizations. One general rule of thumb with these exemptions, when states do allow them, is that the purchases must be for exclusive use by the exempt entity and paid for with funds of the entity. This means that items purchased and paid for with personal funds, even if later reimbursed, would be taxable.
Purchases by the Federal Government are exempt in every state but documentation requirements vary. Most states simply require that there is a purchase order in place but some do require an exemption certificate to be issued. Many people assume that all government purchases are exempt, but some states tax state and local government purchases including MN, SC, WA, CA, AZ and HI.
Also, non-profits/religious organizations do not enjoy a sales tax exemption just because they might have 501(c) (3) status for income tax. Some states do transfer their sales tax exemption to organizations that qualify for 501(c) (3), however most states require that organizations additionally apply to the Department of Revenue. Once the DOR for the state approves the organization, it will either issue an exemption number to be supplied on a specific form (as in NY where they require a 119.1 that includes the state issued exemption number for non-profits) or they issue a letter or certificate to be directly supplied to vendors (as in FL where they issue a DR-14). In general, southern states do NOT grant sales tax exemptions while northern states do. For states that do grant exemptions, some type of exemption certificate is always required for documentation.
In summary, doing your homework on where you have nexus and what rules apply for those states might sound like tedious work but it will pay off in the long run.
Next week, we will discuss why A certificate you have, but can’t find when you need it (particularly in an audit), is useless.