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Nov 01 2019
Sales Tax - The Good, The Bad and the Ugly
April Tanner, CCE, Kimball Equipment

Tax - we all love that word almost as much as the word Audit. Often in the credit managers world the two items combine to form the following dreaded statement - SALES TAX AUDIT.

Over the decades I have been in credit I have been through dozens of sales tax audits of many companies in several industries and multiple States. I don't know about your organization, but at the last three business' I have been a credit manager, it is the credit department's responsibility to ensure my company has the tax exemption certificates on file for each customer when necessary. Some computer software makes this process easier; others can be more challenging.

Because sales tax and audits are challenging and there are many aspects, this will be a multi-part article over a few months. To quote the old Clint Eastwood movie title I am splitting them up in three sections: The Good, the Bad and the Ugly.

     -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)


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.