I often use the phrase “get out of jail free card” when discussing tax matters. Of course, sales tax is not a Monopoly game (it’s much more serious), but if ever there was a “get out of sales tax jail free card,” it’s the exemption certificate you take from your customer to support the fact that your invoice has no sales tax on it. Too often, exemption certificates take a back seat in a company’s sales tax compliance procedures, when a proper system can protect the company from significant liability. Here are five of the most common mistakes we see:
Failure to Collect
One of the most common adjustments during a sales tax audit occurs because the taxpayer has failed to collect the exemption certificate at the time of sale. While many states allow taxpayers to gather exemption certificates during the audit, relying on that fallback position is dangerous for the following reasons:
- Customers cannot be found or are out of business. Most auditors will have little, if any, sympathy for an exempt sale not supported by an exemption certificate.
- Customers with selective memory. On more than one occasion, we have seen customers who, after the fact, assert that the transaction is not exempt from sales tax, even though at the time of sale the customer asserted the transaction was exempt.
- Customers who fear “being next.” Some customers may be very sympathetic to the company under audit but fear their company will be the next audit target. Therefore, they are unwilling to respond to your requests for an exemption certificate.
At no other time will you have more leverage to obtain your certificate than when you are invoicing your customer. Adding sales tax to an invoice, when an exemption certificate is not on file, is one of the best ways to ensure that either the tax is collected as it should be or your company obtains the required documentation.
Failure to Collect in a Timely Manner
States whose exemption certificate requirements are governed under the Streamlined Sales and Use Tax Agreement (SSUTA) have shifted much of the burden for claiming a sales tax exemption to the buyer, provided the exemption certificate is collected within 90 days of sale.
Failure to collect exemption certificates at the time of sale in certain states can give the auditor the opportunity to argue that the certificate is not valid because it could not be accepted in “good faith.” Generally, when a state disallows a certificate on these grounds, it is asserting that the seller should know the purchaser did not have the ability to claim the exemption he or she is claiming because:
- The exemption did not exist at the time of the sale.
- It could not have been applicable to the item purchased.
- It was unreasonable for the purchaser’s type of business.
The ability to accept an exemption certificate in “good faith” can be very subjective and can be avoided by obtaining the exemption certificate at the time of sale for states with laws conforming to SSUTA.
Failure to Review Certificates
If reviewed by an auditor, would your exemption certificate get disallowed on a technicality? Would an auditor “throw it out” because it:
- Is not signed (unless allowed to be provided electronically)?
- Is not properly dated?
- Excludes permit numbers (if required)?
- Is not on the proper form or does not provide all required information in lieu of a form?
- Claims no exemption, the wrong exemption, or an exemption that does not exist? Review of the exemption certificate at the time of acceptance can correct these errors quickly.
Failure to Update
Your company’s exemption certificate compliance should address the fact that exemption certificates expire in certain states and must be renewed in a prescribed time frame. Other issues arise when companies do not address the specific requirements for exemption certificates issued for a single purchase and those which are issued on a continuous basis. Certain exemptions may require that a new exemption certificate be issued for each purchase (Wisconsin’s waste treatment exemption is an example). Finally, do your procedures ensure that customers who “revoke” exemption certificates include sales tax on invoices when appropriate?
Failure to Educate
Exemption certificate procedures and compliance often become the burden of accounts receivable or other accounting personnel. A good compliance system educates those personnel on proper compliance. The education should not end there. It extends to the sales force and customer service personnel. It is important that all personnel involved in the sales cycle understand the importance of established exemption certificate policies and procedures and the potential financial impact of shortcutting those procedures. If you find that your company is guilty of one or more of the above failures, now is the time to act. Wipfli can help you identify and correct your company’s current failures and establish procedures to ensure that your exemption certificate policy keeps you “out of sales tax jail” in the future.