The basics of exemption certificate validity periods
As a vendor, there are a number of times when you can make sales without charging sales tax. Before you can make these transactions, you need to have a valid exemption certificate from the purchaser. Each state has different rules for the validity periods of its exemption certificates. It’s your responsibility to keep track of these rules to avoid having your exemption certificates expire.
Types of exempt sales
Each state exempts different types of transactions from sales taxes. Generally, states waive sales taxes when the purchaser plans on reselling the item; the state will just collect taxes on this later sale.
Each state also exempts taxes on various categories of purchases. It is common to see purchases for agricultural, construction, or manufacturing purposes have eligibility for a sales tax exemption. Lastly, certain organizations, like non-profits, are also eligible to make tax-exempt purchases. Each category of exemption uses a different exemption certificate that you need to keep on file.
Scheduling the renewal of an exemption certificate can be quite confusing. Some states set a definite expiration date for their exemption certificates. For example, in Illinois and Nevada, a certificate expires in five years. This makes renewing fairly straightforward, just follow the timeline. Other states list a specific event that would cause an exemption certificate to expire. In Tennessee, an exemption certificate is valid until a business changes its status or character.
Where exemption certificates start to get complicated is when they don’t have a set date or situation that causes the certificate to expire. Since most states have the ability to revoke certificates at their discretion, it’s important to have a system to store and update your certificates regularly.
When state regulation is vague and doesn’t tell you specifically what to do, you generally need to make a judgment call. You need to decide how frequently to renew your certificates. The more often you renew, the better prepared you would be for an audit.
Tracking exemption certificate validity periods
If you make tax-exempt sales, you must keep your records up-to-date for all your exemption certificates. Be sure to keep track of every customer that uses an exemption certificate and list whether their certificate has a definite expiration date. For states that have a set expiration date, make sure to renew by that time. For states that don’t require a set expiration date, set a renewal date according to the schedule you decided was appropriate.
Keeping track of your exemption certificate validity periods is a bit of a hassle, but you’ll be thankful you did when your next audit comes around. By maintaining accurate records, you’ll be able to continue making tax-exempt sales without running into problems.
Lucinda Rowlands has been the general manager at Zip2Tax since 2010. She has extensively researched sales and use tax regulations in order to help small businesses navigate complicated tax rules.