How to Manage Sales Tax Exemption Certificates Like a Pro
- Jul 10, 2015 | Laura McCamy
It’s important to know when and where you need to collect sales tax, particularly on ecommerce transactions. It is equally important to understand when not to collect sales taxes from your customers.
Some transactions are not subject to sales tax, even in states where you have tax nexus, because your customer is exempt from sales tax. If you understand the basis, managing your customers’ sales tax exemption certificates can be a breeze.
Wholesale transactions (sales to other retailers for the purpose of resale) are usually not subject to sales tax. The assumption is that your customer will collect (even more) sales tax when they resell your item to the final purchaser. If you were to add sales tax to a wholesale purchase, this would amount to double-taxing the item.
In addition, some nonprofits are exempt from paying sales taxes in some circumstances. Avalara has a whitepaper on the topic, which includes a checklist for verifying whether your sales to a nonprofit are subject to sales tax.
Types of Tax Exempt Transactions
Even if your customer has a certificate proving their tax-exempt status, you may find that some of your sales to that customer are taxable and some are not. Only items that will be directly resold (you sell a pair of earrings to a boutique, the boutique sells them to a customer) or incorporated into items for resale (you sell cut stones to a jeweler, who incorporates the stones into earrings that are sold to a customer) are tax-exempt.
Tools, fixtures, and other items that your customer may use to create her wares are taxable; the materials that go into her wares are not. Thus, a jeweler’s soldering iron is subject to sales tax (because the jeweler is the final end user of this tool) but the solder used to create the jewelry is not taxed.
By the same token, when nonprofits purchase items that further their charitable mission, those transactions may be exempt from sales tax, while other purchases by those same organizations may be taxable. Rules governing this vary by jurisdiction.
If a retailer wants to resell your hand-sewn wallets or bottle-top key chains, it’s a big bonus day for your business. Wholesale business can bump up your sales volume by leaps and bounds and simplify your fulfillment.
But before you agree to leave sales tax off their invoices, you need a piece of paper certifying that your customer has a resale license or sales tax registration.
If you are based in one of the 38 states that have signed on to the Multistate Tax Commission, you can use the Commission’s handy Uniform Sales & Use Tax Exemption/Resale Certificate multi-jurisdiction form. If not, check with the agency in your state that collects sales taxes for its form.
If your state doesn’t have a form, you can create your own, as long as it contains all the information you will need to prove your customer’s tax-exempt status. It is a good practice to keep a copy of each customer’s resale certificate on file as well.
Managing Tax Exempt Status
Tracking which customers are tax-exempt and which are not is one more layer of the sales tax onion, particularly for online sellers. Some states, such as California, issue sales tax registrations without expiration dates; others, like Florida, must be renewed every year. This means that you will need to update your tax exemption records for some of your customers annually.
If managing your customers’ tax exemption status is discouraging you from marketing your products to wholesale accounts, you might want to explore Avalara CertCapture. CertCapture stores your customer’s tax exemption certificates in one central (virtual) place, where you have easy access to them. The service also automates the process of obtaining renewal certificates and makes audits much less scary.