Exemption Certificate Management
Make sure you document which transactions are or aren’t taxable
Not everything that is sold is necessarily subject to state sales or use tax. Each state has different regulations governing what is and what is not exempt from the collection and remittance of tax. One general rule of thumb is that the purchaser is responsible for proving that their transaction is tax exempt by providing the seller with a valid certificate of exemption.
As an example, the state of California offers full and partial sales and use tax exemptions.
A partial exemption means that the qualified sale is exempt from the state general fund portion of the sales tax, but it is still subject to the statewide tax rate plus any applicable district taxes. A full exemption includes the state general fund portion of the sales and use tax, the statewide tax rate and district taxes.
Burden of proof #1: It is the responsibility of the purchaser to “prove” their transaction is tax exempt by providing a valid exemption certificate to the seller.
To claim a sales and use tax exemption, the appropriate certificate must be obtained from the Board of Equalization (available online at http://www.boe.ca.gov/sutax/staxformsa.htm) and properly completed. A partial exemption certificate will require a description of the property that was purchased. For example, a retailer of packing equipment would describe the property on the partial exemption certificate as “packing equipment.” The operator of a hardware store who sells hand tools, nuts and bolts to a qualified person for a qualified use could enter the description on the partial exemption certificate as “agricultural tools and parts for farm machinery and equipment.”
Burden of proof #2:It is the seller’s responsibility to maintain an up-to-date file of exemption certificates to “prove” to the state that any given transaction should be tax exempt.
An exemption certificate must be filed with the retailer, provided in a timely manner, filled out properly, and renewed regularly. This means that for exemption purposes, the exemption certificate (partial or otherwise) will be considered timely if it is taken any time:
- Before the retailer bills the purchaser for the qualified property,
- Within the retailer’s normal billing or payment cycle,
- At or prior to delivery of the qualified property to the purchaser or his or her representative, or
- No later than 15 days after the date of purchase.
As each state takes a different approach to exempt sales, exemption types and information required, not to mention the various certificates and forms that may be required, be sure to consult with a professional CPA or a tax lawyer.