Exemption Certificates – Compliance Q&A
- Sales and Use Tax
- January 18, 2016 | Gail Cole
What does it take to be sales and use tax compliant? At minimum, you have to know the proper rate to charge, any applicable exemptions, and where and when to remit returns and payments. Getting sales and use tax right means correctly managing each step in the process — and each step is riddled with potential pitfalls. Questions invariably arise. For example:
What happens if I (the buyer) don’t submit an exemption certificate to the vendor? Should I be saving certificates, or does the seller keep track of them?
These are good questions. Correctly managing exemption certificates is essential to sales and use tax compliance.
Vendors in all states with sales and use tax should refuse to exempt a purchase if the buyer does not produce a valid exemption certificate for the purchase. Take “should” with a grain of salt, as vendors with leaky exemption management systems may continue to exempt sales even in the absence of a valid certificate.
Generally it is the seller who suffers the consequences of an invalid exempted sale. In the event of an audit, the vendor will likely be held liable for the tax and any applicable interest and or penalties.
With respect to use tax, the best practice for buyers is to maintain copies of all certificates issued, including dates. This way, if a vendor refuses to honor a valid certificate, the purchaser can produce a copy of the actual certificate issued and make a good argument for the exemption. In the event of an audit, the exemption certificate validates the exemption.
Exemption certificates are not valid in perpetuity, but they don’t all have the same expiration date. Be sure to renew certificates before they expire or, at the very least, renew them before a new exempt transaction takes place.
The easiest way to handle exemption certificates is to automate the management of tax documents. Learn more.