We figure with it being tax season, we can never talk too much about taxes and all the rules and regulations that go along with them. So, without further ado, we bring you another tax blog. Today’s topic: exemption certificates.
What is an exemption certificate and why do I need to know this?
Sales tax applies to most items of tangible property – something you can usually touch or see –unless there is an exemption under the law, or an exemption certificate. Exemption certificates usually are presented by a customer to a seller. If the exemption certificate is properly completed, the seller will not be required to collect sales tax.
Can all types of sales be exempt?
Generally speaking, there are three different reasons a sale can be exempt from sales tax. These are considered the type of exemption.
- Use Based – These exemptions come from the idea of where and how the product will be used after the sale. Items that are intended for resale are a common example of a use based exemption.
- Product Based – This exemption has to deal with – you guessed it – what type of product is being sold. Exemption laws vary from state to state. For example, shoes are taxable in ND and exempt in MN.
- Buyer Based – Exemptions that are buyer based focus on the type of buyer who is making the purchase. Examples could include government, hospitals or some not for profit entities.
What’s on an exemption certificate?
As mentioned before (and like anything tax related), the rules and specifications of exemption certificates vary based on state. However, there are some general points that are almost always included on an exemption certificate, no matter which state you are in.
- Type of exemption
- Name and address of both the buyer and the seller
- Explanation of what is being purchased
- Tax registration number or other unique identifiers such as a SSN or FEIN.
Sounds good. Anything else I should know?
We’re glad you asked. When state sales tax auditors do their work, they review invoices, types of payment and the information on the certificate for exempt sales. Lately, we are seeing issues where the exemption certificates are not valid because pieces don’t match up. We will give you some examples.
Example one: A tractor was sold exempt from sales tax with a completed exemption certificate on file. The invoice lists Johnson Farms as the as the buyer. However, the financial paperwork indicates Johnson Auto Parts, and the exemption certificate is from Johnson Farms, claiming a farm exemption. Rather than this transaction looking like a farm use sale, it now looks like it was a non-farm use sale at the auto parts store.
Example two: A riding lawnmower was sold exempt from sales tax with a completed exemption certificate on file. The invoice and exemption certificates list Wee-Town Schools as the buyer. The payment for the sale comes in the form of a check from Mike Johnson. Because the schools name is not on the exemption certificate, it appears the lawnmower is not paid for by the school, and is instead an employee trying to buy an item for his own personal use exempt from sales tax.
Example three: An engine is being sold. The invoice lists Ace Anderson Auto Sales, and is paid for in cash. The exemption certificate, however, comes from Alex Anderson for resale. Alex has gone by Ace his entire life, but only uses the name Alex for official business. Although this is the same person, the auditors do not see it that way. Because the names do not match up, there is a problem with this sale.
The moral of the story…
For an exemption certificate to work properly, the name on it must match up with the invoice/payment. We get it, all this sales and use tax stuff can be pretty tricky (although this blog is pretty helpful). Luckily, our trained professionals are here to give you guidance when you need it.