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Tennessee: Unsupported Exempt Sales Source of Lawsuit

  • May 22, 2014 | Gail Cole

 Tennessee business fights its owns policy, and the state, over validity of exempt sales.

In a stunning act of bravado, a Tennessee Department of Revenue for failing to comply with its own policy.

Let’s back up.

Most states allow certain nonprofit businesses to purchase items exempt from sales tax, so long as the business itself makes the purchase. The exempt business must give the seller a valid exemption certificate at the time of sale, to validate the exemption.

Periodically, this policy causes trouble. Earlier this year, for example, a small teacher supply store in Illinois closed after an audit found them liable for sales tax on transactions they took in good faith to be exempt. Numerous customers purchased supplies with cash, paying no sales tax because they presented an exemption certificate from their exempt employer. According to the auditor, since cash was used there is no way to prove the employer actually purchased the exempt items. The employee could have purchased them for personal use, using the exemption certificate to save on sales tax. You know how teachers are.

Now a business in Tennessee finds itself in a similar position, but rather than close shop, it’s fighting back. Hobby Lobby insists that it is not liable for roughly $136,000 in uncollected sales tax (plus interest) because those transactions were sales to exempt organizations.

The argument hinges on the word “directly.” Under Tennessee law, certain organizations may purchase items tax free if the sales are “directly to the exempt organization, organization or historical property.”

Says Hobby Lobby, purchases made by employees of tax-exempt organizations directly benefit the tax-exempt organization. Says the Tennessee Department of Revenue: prove it.

According to the state, exempt sales must be made directly to exempt organizations and purchased with a business check or credit card. Employees of an exempt organization may not purchase items tax-free if they use personal checks or credit cards to pay for them. As noted by a department official, “It’s very clearly spelled out in the state’s tax laws that personal checks cannot be used to purchase items for tax-exempt organizations.”

It turns out that same policy is also clearly spelled out on a Hobby Lobby FAQ page: “Please also note, all tax exempt orders must be placed using a company credit card or a business PayPal account. We are not able to issue a credit for tax if the order is placed with a personal credit card.”

Will Hobby Lobby sue itself for not complying with its own policy?

Don’t let sales tax exemptions cause a fight. Automate.

photo credit: abby chicken photography via photopin cc

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.