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Proper Use of Exemption Certificates Required

  • Dec 6, 2013 | Gail Cole

The Washington State Department of Revenue recently released a retail sales tax determination that hinged on resale and exemption certificates. When properly used, a resale certificate relieves a buyer from the liability of paying sales tax at the time of purchase. An exemption certificate relieves a seller from the liability of collecting sales tax. If no resale or exemption certificate is presented to the seller at the time of purchase, sales tax is due to the state.

The case

The taxpayer involved in the case is a Washington State resident who purchased a boat in Washington State in 2008. No tax was paid at the time of sale, and no exemption certificate was presented to the original seller. The vessel was delivered to the taxpayer in Washington waters and immediately taken to a Washington State boatyard.

The taxpayer asserts the sale is exempt under RCW 82.08.0266, which reads:

“The tax levied by RCW 82.08.020 shall not apply to sales to nonresidents of this state for use outside of this state of watercraft requiring coast guard registration or registration by the state of principal use according to the federal boating act of 1958, even though delivery be made within this state, but only when (1) the watercraft will not be used within this state for more than forty-five days and (2) an appropriate exemption certificate supported by identification ascertaining residence as required by the department of revenue and signed by the purchaser or his or her agent establishing the fact that the purchaser is a nonresident and that the watercraft is for use outside of this state, a copy of which shall be retained by the dealer.”

An exemption certificate was eventually completed for the sale, but not at the time of sale. According to the Findings of Fact, “[The following day], [Taxpayer] signed, under penalty of perjury, a document as [Taxpayer LLC’s] managing member with a heading ‘Exemption Certificate’ (out of state delivery).” Taxpayer LLC is an out-of-state company owned by the taxpayer. The company “paid the balance due on the offer and purchased the vessel.”

However, the exemption certificate used was not a Washington State Department of Revenue retail sales tax exemption certificate. While “the taxpayer contends that the exemption certificate it used for out of state delivery contained substantially the same information for the nonresident sales exemption provided by RCW 82.08.1266,” the department’s Court of Appeals disagrees. The document provided “did not state that the watercraft was for use outside of Washington” as required by the law, nor did it reference “Coast Guard registration or mention registration by any state of principle use. It did not establish the fact that the vessel was acquired for use outside of this state.”

The taxpayer did remove the vessel from the state within the allowed window of 45 days; however, no exemption certificate was presented at the time of the original purchase. The ruling notes that, “Completion of an exemption certificate is a statutorily imposed condition for obtaining this exemption.” As a result, the taxpayer was assessed sales tax on the transaction.

Too little, too late

The taxpayer then tried a different tactic, contending that the LLC purchased the vessel for resale, not as a consumer. The findings of fact state that Taxpayer LLC did, indeed, lease the boat to another limited liability company (Lessee LLC) owned by the taxpayer. Lessee LLC is not a Washington State company.

However, no resale certificate was provided to the seller at the time of purchase. The analysis notes, “After delivery of the vessel in Washington, [Taxpayer] took control of the vessel and brought it to the Washington boatyard. [On that date], there was no evidence of use by [Lessee LLC] or even evidence contemplating acquisition for resale.” The lease was not entered with Lessee LLC until one month after the sale.

“The Department upholds sales and use tax assessments on yachts allegedly purchased for resale or lease, but used by the owners who did not register as dealers or provide resale certificates.” The taxpayer was not registered with the Department of Revenue at the time of purchase, and no resale certificate was provided to the seller.

Therefore sales tax is due.

The moral

States take sales tax seriously. Individuals and businesses that don’t pay it have to present a valid exemption or resale certificate at the time of sale, or else be exempt under state law. Proper and timely documentation is required.

How does your business handle exemption certificates?

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.