Dealing with sales tax can be tricky, especially when it comes to sales tax exemption certificates. These are special forms that allow entities to make purchases without paying sales tax. But it’s not enough just to gather these forms from customers. Your business needs to make sure they’re up-to-date, complete, and valid.
Whether you’re selling to other businesses or to groups that don’t have to pay sales tax, you need to know how to handle these forms correctly. This post will help you understand what these certificates are, how to get them the right way, and how to check if they’re valid.
Understanding Sales Tax Exemption Certificates
Sales tax exemption certificates are forms that buyers provide to sellers. They prove that the buyer doesn’t have to pay sales tax for certain reasons, such as purchasing products for resale or purchases made by a nonprofit organization.
There are different types of exemption certificates. Not all states have each kind, but throughout the United States, these are the types of certificates you may encounter:
- Resale Certificates: Used by businesses to purchase goods for sale to an end user. In the United States, sales tax is paid only on the final retail sale, in most cases.
- Nonprofit Exemption Certificates: Given by charitable or educational organizations to avoid paying sales tax on items for use by the organization.
- Other Exemptions: Depending on the state, other exemptions might include agricultural, industrial, or governmental.
It is important not to charge sales tax on sales that should be exempt, but due diligence is required to make sure the sale is truly exempt. Collecting and validating these certificates helps businesses avoid legal issues and penalties. If state tax authorities discover a business has been handling these incorrectly (or not at all), it could lead to fines or audits.
How to Manage Exemption Certificates
Step 1 – Collecting Certificates
Collecting sales tax exemption certificates is a critical step for businesses that sell goods or services exempt from sales tax under certain conditions. Proper collection and storage of these certificates keep your business compliant with tax regulations and protect you in the event of an audit.
The best practice is to collect the exemption certificate and validate it prior to the sale being made. If you wait until after the transaction is completed, you may find your buyer to be uncooperative in providing the certificate, or even fraudulent in claiming the exemption in the first place.
Step 2: Validating Certificates
Validating sales tax exemption certificates is as crucial as collecting them. Validation ensures that your business is not liable for sales tax on exempt transactions. Here’s how to approach the validation process effectively:
- Check the Expiration Date: Confirm that the certificate is current and not expired. Note that some certificates do not have expiration dates, while others may need annual renewal. If the certificate expires, make a note in a database or calendar system so you know to contact your customer for an updated form.
- Verify the Buyer’s Information: Ensure that the buyer’s name, address, and type of business match what’s on their certificate and in your records.
- Confirm the Certificate’s Applicability: Make sure the certificate applies to the items being purchased. Some exemptions are product-specific.
- State Verification: If possible, use state websites or tools to verify the validity of the exemption certificate. Many states offer online resources for this purpose.
Step 3: Storing Certificates
Whether you store certificates digitally or in paper form, security and organization are critical. Organizing certificates by customer and by state will help you locate them when needed, as it’s important to be able to find the appropriate certificate if you need to verify the information, applicability, expiration date; or if you are audited.
Keeping track of expiration dates is also important, which is where a database or spreadsheet of certificate details can come in handy. Exemption certificate management services can perform this task as well.
Exemption certificates often contain sensitive PII (Personal Identifiable Information). Therefore, it’s also important to store the certificates securely. For digital storage, you’ll want secure storage with access control and regular backups. Paper forms should be kept under lock and key, with only critical team members having access.
The length of time that you store certificates is also a consideration. Different states have different requirements, but generally, it’s advisable to keep certificates for at least four years after the last use.
Step 4: Integrating with Purchasing Systems
Once the certificate has been received and validated, it likely needs to be integrated with other systems such as your e-commerce website, point-of-sale systems, and accounting software. These systems need to know not to charge sales tax to exempt customers on applicable items and orders.
Step 5: Reviewing and Updating Certificates
Regularly update and review your records to ensure all certificates are still valid and up-to-date with current tax laws. If a certificate is expiring and the customer is still active, you should request a new certificate prior to the expiration.
States’ laws surrounding exemptions also change, so staying up-to-date with legislation and process changes is also advised.
Finally, if your customer’s information changes – for example, their business address or ownership changes, or their charitable organization status is revoked – a new certificate may be needed, or the exemption may no longer apply.
Common Mistakes to Avoid
Here are some of the most common mistakes made by businesses, which can cost significant money in fees, penalties, and interest, especially during a sales tax audit:
Accepting Outdated or Incomplete Certificates: Always check the date and ensure all required fields are completed.
Not Verifying Buyer’s Eligibility: Ensure the buyer is eligible for the exemption they are claiming.
Failing to Update Records: Regularly review and update your exemption certificates as laws and customer statuses can change.
For businesses operating in multiple states, it’s important to understand that each state may have its own forms and requirements for sales tax exemption certificates. Therefore, it’s essential to familiarize yourself with the regulations in each state where you conduct business.
Effective management of sales tax exemption certificates is essential for maintaining compliance and avoiding penalties. By addressing common challenges with proactive strategies and solutions, businesses can streamline their processes, reduce risks, and focus more on their core operations. Remember, while technology can provide significant assistance, the ultimate responsibility lies with the business to ensure all sales tax exemption certificates are properly collected, validated, and managed.
