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By Altus Group | March 22, 2017

Brief Intro to Sales Tax and Tax Exemptions

Sales Tax, a normal part of business purchases whether you are the buyer or seller, can be a huge headache when considering various states, business types and transaction situations such as bundled transactions, shipments and nexus. Before diving into the 3 pitfalls to avoid with Sales Tax Exemption Certificates, here are the basic aspects of the sales and use tax law.

Forty-five states administer sales and use tax. It is typically the seller who bears the burden of proof for the exempt sale. Therefore, if a customer claims an exemption from sales tax, the seller must ensure that the correct forms are obtained, properly completed, and retained for later examination by a state auditor. Be cautioned, any licensed business is a potential audit candidate. In an effort to modernize and simplify the sales and use tax system there is now a Streamline Sales and Use Tax agreement. Today, 24 states (in green) have adopted the simplification measures in the agreement. Click the map to learn more.


3 Pitfalls with Tax Exemptions

1. Collection- A survey by Credit Research Foundation (CRF) revealed that 81% of responding companies identified the process of collecting certificates from their customers a huge challenge to overcome.

Advice – Start by reviewing your company’s current exemption certificate policy, then determine if it’s adequate for your current needs.  Many times, an organization’s business evolves much faster than its policies, creating opportunities for errors under audit.

2. Lack of verification – It is easy to overlook the small details, but those minor details can be costly resulting in tax assessments, interest, and/or penalties.

Advice – It is highly suggested, irrespective of the state and its particular requirements, that the seller routinely confirm the following information is included in the exemption certificate:

  1. The type of exemption claimed
  2. The names and addresses of purchaser & seller
  3. A description of the goods being purchased
  4. The reason for claiming the exemption (exempt use or exempt entity)
  5. The purchaser’s tax registration number/ business license (if required)
  6. Expiration date of certificate (if applicable)
  7. A signature of the purchaser & date.

3. Failing to conduct your own audit – the quality of your company’s exemption certificate process will determine the fate of a potential audit. If it’s been a while since you last took a look at the collection of certificates you have, you may want to do so now.

Advice – Have a managing process that is clear, repeatable and measurable. Catalog the current certificates on file; inventory the ones that appear incomplete, create a list of companies you are missing certificates from, and definitely record expiration dates.

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