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Texas: Exemption Certificates Matter

  • Jun 3, 2015 | Gail Cole

 Unless proven exempt.

A taxpayer in Texas was audited and found to be out of compliant with sales and use tax laws because of improperly managed sales tax exemption certificates.

At the auditor’s request, the taxpayer provided the following documents for the audit period October 1, 2007 - March 31, 2011:

  • Federal income tax returns
  • General ledgers
  • Sales invoices and contracts
  • 400 +/- exemption certificates


Upon examining the documents, the auditor found many of the exemption certificates to be incomplete or inaccurate. Ultimately, the auditor determined that of approximately 500 exempt sales, “440 were scheduled for tax” due to either incomplete or missing exemption certificates.

On February 29, 2012, the auditor sent the taxpayer a letter informing him that he had sixty (60) days from the date of the letter to present “any additional evidence,” including “any resale and exemption certificates.” It also made clear that “any certificates presented after the 60-day period would not be accepted.”

On the 61st day, the taxpayer presented the auditor with additional exemption certificates. Although the date for review had passed, the auditor did look at some of the certificates and found some to be valid. Most, however, were not. On the 62nd day, the taxpayer gave the auditor two additional boxes of certificates. These were not considered due to the late date.

In Texas, there is a sales and use tax exemption for machinery and equipment exclusively “used or employed or a farm or ranch in the building or maintaining of roads or water facilities or in the production of:

  • Food for human consumption
  • Grass
  • Feed for animal life
  • Other agricultural products to be sold in the regular course of business

Many of the taxpayer's exemption certificates were found to be invalid because the exemption was based on “farm use” or “ag use.” The taxpayer sells all-terrain vehicles such as dirt bikes, go-carts, lawn equipment, and boats. These do not qualify for “farm use” or “ag use.”

The taxpayer insists that he was not required to police his customers While that is true, it is also true that it is a seller’s responsibility to:

  • Accept a properly completed certificate at the time the transaction occurred.
  • Have familiarity with the exemptions that are available for the items that are sold.
  • Lack actual knowledge that the exemption claimed is invalid.
  • Be in possession of the exemption certificates at the time the audit fieldwork begins.

In the end, the Administrative Law Judge determined that the taxpayer “failed to prove by clear and convincing evidence that the claimed transactions are exempt from taxation.” Additional details are available in the Administrative Law Judge’s decision, SOAH Docket No. 304-14-3389.26.

Simplify exemption certificate management by implementing an automated solution that creates, validates, stores and manages sales tax exemption and reseller certificates and makes them available for easy (and timely!) retrieval. Learn more.

photo credit: Taxable via photopin (license)

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.