In the world of fuel taxes, there are two forms of compliance documentation suppliers and distributors will frequently encounter. One is sales tax exemption certificates. The other is fuel excise licenses.
It can be tempting to manage these two types of documents in a similar fashion. That would help make things nice and simple—but nothing about sales and excise taxes is simple. There are some key differences to take into account when dealing with licenses and certificates, which we’ll go over in this post. Read on for a quick overview of what differentiates fuel excise licenses from exemption certificates, why both are necessary, and what your company can do to ensure they’re properly collected, stored and managed.
Why Licenses and Certificates Are So Important
Both types of compliance documents serve critically important purposes. State exemption certificates provide the proof that’s required under audit that a company has been legitimately, legally charged for a transaction without having to pay sales tax. Without a certificate, the seller can become responsible for costly back taxes and penalties.
Licenses, meanwhile, provide proof that a company has registered to conduct fuel transactions within a specific state. Holding a license registration number will often open doors to tax exemptions in some states, whereas a lack of licensing can increase audit liabilities.
What are the key differences? Let’s take a look.
#1: Exemption Certificates Are Actual Documents
Excise licenses are not. It’s rare to ever see a piece of paper or a digital document associated with a fuel excise license. When you register with a state to sell fuel, you obtain a registration number that proves you can legally conduct fuel transactions within that state. Most states store these oil and gas license numbers in publicly accessible web-based databases.
Exemption certificates, on the other hand, are physical documents that must be thoroughly and accurately filled out when a company is claiming a sales tax exemption. They are not filed with states. In the event of an audit, companies must produce these physical documents themselves, as evidence they were supplied at the time of transaction.
#2: Exemption Certificates Expire
Fuel licenses do not. With most exemption certificates, you can create a list of dates by which they must be renewed to maintain compliance.
Not so with fuel licenses. States don’t require regular renewals, and they won’t notify you when a company you do business with has registered for a new license. It’s up to you to regularly collect and store valid, active license numbers from partners and vendors.
#3: Exemption Certificates Prove Exemptions from State Sales Tax
Fuel licenses, on the other hand, prove authorization to do business in a state and can have a direct impact on the amount of tax that needs to be charged. Both can have significant business implications, but in very different ways.
In some jurisdictions, for example, fuel companies that have provided their partners with valid license registration numbers could be charged significantly lower per-gallon tax rates—we’ve seen it dip by as much as 18 cents per gallon with Avalara clients—than those who don’t.
In addition, failing to validate a licensing status can make a fuel company liable for uncollected taxes in the event of an audit. This has happened even to established fuel suppliers. In one case, a large international company sold to a partner for years without ever asking for a license, and as a result was eventually on the hook for $3 million in back taxes when the oversight was revealed under audit.
A lack of exemption certificates can lead to similar consequences, but for different reasons. Claim or honor a sales tax exemption without proof, and eventually someone’s going to have to pay those taxes.
#4: Exemption Certificates Sometimes Cross State Boundaries
Fuel excise licenses never do. With sales and use tax, a company can sometimes fill out one multijurisdictional exemption certificate that becomes valid in multiple states. Licenses don’t work that way. Registration numbers are provided per state, and in some states there can be dozens of different ones for companies to apply for depending on the type of fuel and how or where it’s sold.
What does this mean for you?
When it comes to state and federal compliance, both forms of documentation are equally important. Licenses and certificates enable fuel companies to apply the proper tax rates, support exemptions and provide the proof auditors will require. A few key steps will help ensure compliance and minimize audit liabilities:
- Always collect (or provide) an excise license number or exemption certificate at the point of transaction, and do not apply (or accept) reduced rates and exemptions without this documentation on file.
- To save time and minimize manual errors, automate as much of the process as possible, from digital capture of exemption certificates to automated emails and printed letters for renewal requests.
- Any time you’re working with a licensed supplier, be sure to check in once or twice a year for new or updated excise license information. You can do this by manually checking state websites—either yourself or through outsourced specialists—and by doing annual or biannual check-ins for active, valid license numbers.
If you still have questions about what it takes to remain compliant with exemption certificates and fuel licenses, Avalara CertCapture offers two free resources that will help. Download them today to get started on all of the steps outlined above:
- The Ultimate Guide to Sales Tax Exemption Certificates: This free eBook demystifies the process of collecting, validating and storing valid exemption certificates.
- Excise License Request: This cut-and-paste, fill-in-the-blank email template can be used to conduct annual or biannual excise license checks.
Request a demo today!