As a general rule of thumb when dealing with sales taxes, know that there are two sides to every story.
It may appear that the person who holds the most responsibility for handling sales tax exemptions correctly is the person who is making the tax-exempt purchase. But as with all things sales tax, it is rarely that simple.
Sellers who accept exemption certificates have responsibilities too. And on either side – whether you’re the purchaser or seller – not handling exempt transactions and exemption certificates correctly could lead to costly issues come audit time.
We’re going to reveal some of the questions you need to ask if you handle exemption transactions, both for purchasers and sellers. Asking these questions could be the first step towards making sure your clients are compliant for sales tax exemptions.
Questions for Sellers Who Handle Exempt Transactions
If a purchaser wants to make a tax-exempt purchase, your sales representative or cashier gets the purchaser’s exemption certificate, and if everything looks good, the sales rep or cashier keys in the sale as tax exempt. Well, it’s not that simple.
If your client is a seller making exempt sales, these are some of the questions they need to ask:
How do you deal with name mismatches (i.e. when the name on the exemption certificate doesn’t match the name on the seller’s records)? Many sellers set up their customer master using a company’s dba name instead of the legal name. However, exemption certificates and sales tax registrations are in the legal name. This can create issues during audit for auditors that aren’t familiar with common dba’s.
How frequently do you make updates to catch changes in customers’ names and registration numbers? For example, if a purchaser changes from a corporation to an LLC, they may need to get a new sales tax registration number. If not, their exemption certificate may no longer be valid.
How much advice and direction do you give to customers when they’re filling out exemption certificates?
These questions are good starting points to get your clients thinking about changes they may need to make in company protocol for handling exemption certificates.
Questions for Purchasers Making Exempt Purchases
Administering sales tax exemptions and exemption certificates is just as important for purchasers. There are quite a few issues that you’ll need to take into consideration if you make exempt purchases.
Asking the following questions can help to make sure your clients are compliant:
Do they have a system to keep track of all the exemption certificates that the company sends out? It is vital to maintain good records of exemption certificates, so if they need to rescind a certificate due to a business or law change, they know which seller has one on file.
Who has the authority to issue exemption certificates in your business/organization? Keeping the authority to issue certificates limited to a few authorized employees can help ensure that you can easily track and maintain records of the certificates that have been issued.
What items should be listed on the certificate for what the exemption certificate covers – should the scope be broad or narrow?
Do you have a protocol in place to deal with sellers that can’t accommodate some purchases being taxable and some purchases being exempt?
These are some good questions to get your clients thinking about the scope of their responsibility as an exempt purchaser, but there are many other factors to take into consideration.
Diane Yetter, CPA, MST is president and founder of YETTER, a sales tax consulting and tax technology firm in business since 1996. She is also founder of The Sales Tax Institute, a premier think tank that offers live and online courses to educate business professionals about...