Missing Exemption Certificates Could Cost You a Bundle on Audit

By June 30, 2011 Uncategorized

For many years, non-taxable “sales for resale” were just accepted as being exempt if the auditor knew the purchaser was in the business of selling the type of products being sold to them by the vendor.  Those days are gone.  Now that states are short of revenue, every non-taxed sale must be supported by and exemption certificate valid in the state of the sale.  The failure of the vendor to have the appropriate resale exemption certificate can create a liability for them under audit.  In most cases, the auditor will allow the vendor to secure any missing certificates from the customer.  However, if the customer is out of business or refuses to provide the certificate, then the vendor is liable for tax.  This can be a huge, unexpected, and unnecessary expense of the vendor.

The issue is compounded when dealing with 3rd party drop shipments.  That is, when the supplier ships goods to the state where their customer’s customer is located.  This happens a lot when dealing with large equipment or other items that are expensive to ship.  Because the exemption certificate must be valid in the destination state, the vendor must obtain a certificate from their customer in the shipping state not the state where the customer is located.  The exemption certificate requirements are different for most states and this can be a real challenge.

I recently reviewed the exemption certificates for a company and determined that there was over $1.3 million in sales tax liability due to missing certificates.  Once they secure the required certificates, this liability will be reduced to $0.00.  If you or your clients are missing the documentation to support any type of exempt sale, the burden is on them to support the exemption if they are audited.

This may be the easiest sales tax solution to fix. It’s also the easiest to overlook.

Ned Lenhart, CPA
Interstate Tax Strategies