-Tax exemption certificates/forms (THE GOOD)
-"Wayfair" and nexus (THE BAD-not really bad but
the biggest change in sales tax for everyone in decades)
-Audits (THE UGLY-but they don't have to be)
DISCLAIMER
This series is meant as an overview of
sales tax - I am not an auditor (but have been though many audits) and I am not
a tax accountant (but know a few) and am not a lawyer (obviously.) This article
is written from my viewpoint and understanding of processes learned over the
many sales tax audits I have endured. Please consult with your own company's
tax experts if you have questions about sales tax. There are many
attachments to this article, and they are based on the State information found
at the time this article is published.
The Good - Sales Tax Exemption Forms
Once a customer advises your company that they are
tax exempt, you will need to have the correct form filled out and signed by the
customer and in your files. For all exempt sales your company must have a form
on file, even to a government entity. Yes, Governments (State, County, City,
Districts and Highway Departments, etc.), Tribes, farms, churches etc. are
required to provide you a filled out and signed form. Auditors will ask to
see the form and verify that it has the exemption number, box checked, or section
filled out, correct customer name (legal name) and is signed and dated. At my company we file the form in multiple places. We must have a hard copy in
ring binders filed by State/Customer name. We also keep an electronic copy in a
computer file. Internally we use the electronic file most of the time to verify
tax exemption status. Our electronic file is by State then Customer Name. When
an auditor has been on site, they have preferred the binder to verify the
exemption over diving into our computer database.
Retention of the sales tax documents is up to each
company's policy. The companies I have worked for have opted to keep the forms
indefinitely as they take up a minimal amount of shelf space and computer
storage compared to the problems that could occur by not having the documents.
We also keep all exemption forms related to a company when they change names,
corporate structure, merge etc. You should know your company's retention policy
regarding tax documents and confirm that the retention policy aligns with the
State regulations on auditable years. It would be horrible if a tax audit goes
back 8 years and your company has a 7-year retention policy.
Each State has its own laws, rules, regulations
and forms. Some States require their own forms, others accept the multistate
exemption form (a sample of the Utah form and the multistate form are
attached.) A few States accept the resale number from one State in another. For
example, I recently found out a customer who has a resale certificate in Nevada
can buy and pick up parts in Utah and use their Nevada resale certificate/form
in Utah. Utah accepts the foreign State form if the vendor is willing to accept
the document. The Utah company is not required to accept the other States
resale certificate, but they can. The information I have lists nine States that
do not accept out of State resale certificates: California, Florida, Hawaii,
Illinois, Louisiana, Maryland, Massachusetts, Washington and Washington D.C.
Other States have exemption certificates that expire for example, Arizona. Arizona also has two different tax-exempt
forms, one for resale and the other for everything else (samples of the two
forms attached.) Luckily our accounting software allows for an exemption date
and automatically starts charging sales tax once the expiration date passes.
Another type of exemption form you many see is a Border States Resale Exemption (copy attached.) If your company has locations
in Arizona, California, New Mexico or Texas you should be familiar with the form.
We recently had a California sales tax audit and the auditor did review all
sales using a freight forwarding company at the Mexico/U.S. border and all the
Border States Exemption Certificates.
A fairly new form, at least to me, is a Partial
Exemption of sales tax rates in California for specific industries. When this
law was passed and implemented, we decided to be proactive and contacted the
California Board of Equalization (sales tax division of the California
Government.) We had a conference call to discuss all of our questions about
compliance as this was such a new and usual type of exemption. I have attached
a copy in case you wanted to see it. This partial exemption was set to expire a
few years ago but was extended.
Tax exemption letters are the last type of
exemption form to discuss. Some companies provide a letter stating they will be
tax exempt because of a type of project or work site. These letters are provided in place of a
tax-exempt certificate and are valid. The letter can be on company letterhead
or State letterhead and will list the company name, address and project address
and why exempt. (I have attached a copy of a letter from Nevada that has
redacted names in case you wanted to see it.)
Most States do not require the vendor verify a
customer's tax exempt's validity. Most forms include wording on the form like
on the Arizona form 5000A section F. Usually if your company has the form the
customer filled out and signed on file your company has fulfilled the legal
requirements. However, if you look at the Idaho certificate attached - towards
the top of the form is a disclaimer that the seller has obligations. It is up
to the customer to rescind the exemption if/when necessary at a later date. It
is always good policy to fully read and understand each type of exemption
certificate your company may receive and keep up to date on any changes and
updated the forms receive over the years.