Avoiding Audits | Manage Exemption Certificates Correctly
Certain business practices, or lack thereof, can make you vulnerable to a sales tax audit (dun, dun, dun). We know these can be scary, both for an individual and a business. We’ve reviewed some of these practices previously to help you avoid these vulnerabilities, including under-filing in remote states and filing and paying sales tax late.
Today, we’re covering exemption certificates, so you can get your business on track, and decrease your risk of a sales tax audit. (Plus, handling exemption certificates correctly can save your business money, so that’s a win-win.) By following the tips below, you can rest easy knowing that your exemption certificates are being managed correctly. Have some more best practices to share? Let us know in the comments!
What exactly are exemption certificates?
In most cases, the products you sell online are subject to sales tax, at least in states that charge sales tax and where you have nexus. There are times, however, when a buyer is exempt from paying sales tax on their purchase and is entitled to a tax-free sale (woohoo!).
In order for this to be valid, and to avoid getting into any trouble with the IRS, the buyer must provide you with an exemption certificate.
Exemptions vary by state, but common ones include
- Items purchased in bulk for resale.
- Products purchased by non-profits.
- Sales tax holidays.
- Goods purchased for the purpose of producing other products
(for instance, a microwave in a motor home)
So who’s actually responsible here?
Here’s the deal: It’s on the buyer to obtain, fill out (accurately), and submit a valid exemption certificate. If they don’t do this, you’re required to charge them sales tax. You have to keep your eyes open with these things.
However, if they do submit their valid exemption certificate, this doesn’t mean you’re totally off the hook. As the seller, it’s your responsibility to determine if the provided exemption certificate is valid and legal. If the exemption certificate is invalid for any reason (out-of-date, incorrect form, etc.) and you accept it, you could be responsible later for paying the sales tax you didn’t charge your customer.
But how am I supposed to know if it’s a valid exemption certificate?
Like most governmental processes, forms vary depending on your customer’s state. Generally speaking, though, valid exemption certificates contain the following information:
- Exemption category
- Names and addresses of both buyer and seller
- Date (either prior to or the same date as the sale)
- Legible signature
- Buyer’s tax registration or business license number
- Description of the item(s) being purchased
Invalid forms include those with missing information, a mismatch between the name on the form and the name of the buyer, or the form listing the incorrect state.
To simplify matters a bit, more and more states are now participating in the Streamlined Sales Tax Initiative, which means customers in many different states now use the same form.
Anything else I should know?
Now that you’re on the lookout for valid exemption certificates, and to only go through with a sales tax-free transaction when you receive one, it’s essential to keep track of those exemption certificates. Tracking any sales tax exemptions on a spreadsheet and saving copies of the certificates is considered best practice, and will protect you if you’re ever audited (heaven forbid!). If you deal with a large number of exemption certificates, you may want to invest in exemption certificate management software.
By staying on top of exemption certificates in a proactive manner, you can help protect your business, and avoid triggering an audit. There are lots of best practices out there, and this is just one of many. To learn more, check out some of our other resources, or even give us a call. Our support folks are delightful and would love to learn about your business.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.
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