Are you taking advantage of all the sales tax exemption opportunities available for your business? Have you heard of exemption certificates, but are unsure if your business is eligible? Whether you are new to the world of sales tax or looking to brush up on the essentials, this blog post will walk you through the basics of exemption certificates, how they work, and how to manage them effectively. 

Who Can Use An Exemption Certificate and When?

A sales tax exemption certificate is a document provided by the buyer to the seller in order to purchase taxable goods or services without paying sales tax at the time of the purchase. The document certifies to the seller that sales tax does not need to be collected on the transaction for a certain reason. 

Buyers who can use an exemption certificates may include resellers, nonprofit organizations, government agencies, and manufacturers or processors, depending on state law. For purposes of this blog post, we will be covering one of the most common users of exemption certificates: resellers. 

The definition of a “reseller” can vary by state, but a reseller generally includes anyone who is purchasing products to resell to a final consumer. In most states, purchases of items that are incorporated into the final product that a business is selling also qualify for the resale exemption. For example, if you are a craft seller selling jewelry that you make using beads and charms, purchases of those beads and charms may be exempt from sales tax under the resale exemption. Note that this exemption does not include the supplies used in making your product, such as scissors or a measuring tape, but only items that are fully incorporated into the final product that is sold. 

It is also important to note the differences between an exemption certificate and a resale certificate, since some states make a distinction between the two. An exemption certificate allows you to make tax-exempt purchases based on your status as a one of the buyers listed above, like a nonprofit or government agency. In some states, this also includes resellers. In other states, however, resellers are required to fill out a different document, called a resale certificate, that allows them to purchase items tax-exempt specifically because the items will be resold or incorporated into the final product that is sold. Since the document required depends on the state, it is crucial to understand your state’s laws so your certificate will not be rejected or deemed invalid. 

Buyer’s Responsibilities 

As a “Buyer,” or the person purchasing goods or services exempt from sales tax, you are responsible for determining your state’s laws regarding exemption certificates. You should have an exemption certificate or resale certificate for each state in which you have nexus, whether physical presence nexus or economic nexus. The majority of states accept the Multistate Tax Commission’s Uniform Sales & Use Tax Resale Certificate, which is a certificate developed by the Multistate Tax Commission in accordance with various state laws that Buyers can use for multiple states.1 The certificate specifies which states will accept the form as an exemption certificate, a resale certificate, or both. The certificate also has instructions describing what information the Buyer is required to include in order to ensure that the certificate complies with state laws. There are a few states that do not accept the Uniform Sales & Use Tax Resale Certificate and have a separate, state-specific form that must be used. 

The Buyer is the party responsible for determining which states they have nexus in, whether they qualify to use an exemption or resale certificate, and specific state laws on exemption or resale certificates. The Buyer should also maintain detailed records of the certificates issued to Sellers. Of course, the Buyer is also responsible for charging sales tax at the time of the transaction between the Buyer and the end consumer, if there is nexus.

Seller’s Responsibilities 

If you are a seller who has been presented with an exemption certificate, you are on the flip side of this transaction. So, you may be wondering what your obligations are when you receive an exemption certificate from a Buyer. Sellers are responsible for validating exemption certificates they receive, which includes checking the Buyer’s information, the validity of their state sales tax ID, and whether they presented the correct information based on that state’s laws. 

As a Seller, you must authenticate this information to make sure you do not accept an invalid certificate. You also need to store every certificate you accept, so that you have detailed records of why you did not charge sales tax on that transaction in case of an audit. 

Tips for Exemption Certificate Management

Whether you are a Buyer or a Seller, the importance of maintaining your records of exemption or resale certificates cannot be understated. Auditors will look closely at why a certificate was presented or accepted. Furthermore, exemption certificates often have an expiration date, so both buyers and sellers should be continuously checking and updating their records to make sure they are complying with state laws. 

Managing exemption certificates can be time-consuming, and the consequences for noncompliance can be steep. Let State Tax Advisors assist you in determining if you qualify for an exemption, understanding your obligations as a Buyer or Seller, and managing your exemption certificates so you can protect your business from vulnerabilities. 

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1 https://www.mtc.gov/resources/uniform-sales-use-tax-exemption-certificate/