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What Is Your Obligation to Verify Sales Tax Exemptions?

  • Jun 4, 2016 | Suzanne Kearns

As a seller of tangible goods, you’re likely approached by buyers who want to use sales tax exemption certificates to purchase items from you without paying sales tax. There are any number of legitimate reasons for this, and if someone presents you with a valid exemption certificate, it only makes sense to honor it. For example, the buyer could be making the purchase for resale, or for a nonprofit that is exempt from paying sales tax.

But accepting sales tax exemptions comes with some responsibilities, and if you don’t go about the process the right way, it could result in an auditor deciding against you in an under-collection assessment.

States ask sellers to make sure the exemption certificates they’re presented with are legitimate, but not all states use the same guidelines for making that determination. Some states use a “good faith” standard, while others ask sellers to rely on a “four corners” standard. Let’s take a look at what each one entails for sellers.

The “Good Faith” Standard

About half of the states in the US use the “good faith” standard, which places a bigger burden on sellers. With this standard, it’s not enough for a seller to simply accept a legitimate exemption certificate, trusting that the buyer is being honest about their intentions. Instead, states like Arizona ask the sellers to evaluate the purchase to ensure the buyer is being honest and the seller can only accept the certificate when they feel there is no reason they should deny it.

Texas takes this standard a little farther by asking sellers to gather information that helps them understand everything about the transaction. The law states that a seller can’t use the “should have known” argument if an auditor calls the transaction into question.

In short, this standard requires that sellers do more than simply accept a valid sales tax exemption certificate. It also requires them to analyze the transaction and determine whether or not the buyer has honest intentions.

The “Four Corners” Standard

Members of the Streamlined Sales and Use Tax Agreement (SSUTA) make use of the “four corners” standard when it comes to accepting sales tax exemption certificates. This standard is easier for sellers because instead of asking them to discern whether or not the buyer has honest intentions of using the certificate correctly, it simply asks them to ensure the certificate is filled out fully and correctly.

However, if a seller knows that the buyer is using the exemption certificate fraudulently, they cannot use the “four corners” standard to make the sale.

The states are split on the method sellers should use when verifying sales tax exemption certificates, and it’s important that you understand the rules in each state in which you sell.  The IRS offers a comprehensive list of government offices in each state, including the Department of Revenue offices. Contact them and ask about which standards you should use when verifying exemption certificates in their state.

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.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns