Customer Exemption Management - CCH

1 Customer Exemption Management Successful Customer Exemption Management is critical to a business that has exempt customers (or customers that can be treated as exempt under certain situations). Understanding the relevant requirements will help you minimize tax exposure and future audit assessments. Visit Introduction Product-based exemptions ( food, Exemption Certificate Types clothing, medical, newspaper) are supported One of the most important but often by statute and do not require Exemption and Sources challenging tasks for many companies certificates to support the Exemption , There are several Customer exemptions doing business in taxable states is managing whereas entity-based and use-based (or exemptions that are available to their Customer exemptions. From an exemptions usually require some sort of customers based on an exempt use) that audit exposure and potential future audit Exemption documentation to support the taxing authorities accept, including but assessment standpoint, there should be allowable Exemption and to release the seller not limited to: extra sensitivity shown and additional effort from the obligation of collecting tax on a allocated towards this ongoing task.

2 Proper 1. Resale taxable transaction. Management of this function has various 2. Government facets that need to be considered such as: Entity-based and Use-based 3. Exempt Organization ( religious, 1. Exemption certificate requirements ( Customer Exemptions educational, and charitable). if required by law, acceptable form or 4. Manufacturing/Industrial For purposes of supporting either format multistate, state specific based an entity-based ( government, 5. Agricultural on Exemption classification, separate charitable organization) or use-based local, etc.) 6. Direct Pay Permit ( manufacturing, agricultural, resale). 2. Expiration periods Exemption , most taxing authorities require 7. Capital Improvement proof that the Customer is exempt, and 8. Aircraft Maintenance 3. Scope and application limitations in most cases, this proof comes in the form 4.

3 Good faith requirements of a valid Exemption certificate. Relative to 9. Data Processing 5. Home-state certificate provisions relating entity-based and use-based exemptions, 10. Enterprise Zone to drop-shipment transactions if the Customer doesn't provide hard copy All taxing jurisdictions have some Exemption documentation, or in some combination of these exemptions and 6. Single-use administration states, the required data elements to have their own Exemption certificate 7. Product/service exclusion and support the Exemption in electronic form, requirements and limitations associated administration the Customer is not considered exempt with them. nor is the licensed seller released from the 8. Customer relations liability of collecting the tax that is due. In performing Customer Exemption There are a few exceptions to the general Management there are various sources of At the end of the day, successful Customer Exemption certificate documentation that can rule such as: Exemption Management is critical to a be obtained and used to support a Customer business that has exempt customers (or 1.)

4 A sale to the federal government, which Exemption , which include the following: customers that can be treated as exempt usually only involves demonstrating the under certain situations), in order to identity of the government agency via an Exemption and resale certificates minimize tax exposure and future audit invoice, purchase order or contract. published by the state or locality. assessments. Since sales tax is generally Uniformed Multi-jurisdictional Exemption 2. A seller's permit number that will suffice a pass-through tax and in most cases Certificate produced by the Multistate Tax for purposes of supporting the Exemption . the seller is required to support any Commission (MTC) limited to exemptions claimed relative to their exempt 3. An import letter demonstrating that the 38 states and primarily limited as a sales transactions, it is advantageous to goods are intended to be shipped outside resale certificate.

5 Understand the relevant requirements the United States. Streamlined Sales Tax Exemption and then implement the needed systems, Whatever Exemption documentation Certificate specifically designed for the policies and procedures that will ensure requirements exist to support an twenty-three Streamlined Sales Tax states. compliance with state and local laws. Exemption , a seller needs to understand Home-grown Exemption certificates may that in most cases the burden of obtaining General Requirements the required Exemption documentation also be acceptable providing they meet the Exemption certificate requirements as Under the general theory of sales and use and proving to a taxing authority that outlined in individual state statutes. tax, the sale or use of tangible personal a Customer is exempt from tax is their property is presumed to be taxable unless responsibility.

6 The seller will be held otherwise made exempt by statute or if a accountable for non-compliance in an valid Exemption certificate is obtained from audit situation. the Customer in lieu of collecting the tax to support a claimed Exemption . Consequently, differentiating between exemptions that require Exemption documentation and those that don't is important both from an administrative and a systemic standpoint. 2. Exemption Certificate Receipt Other Important Twists and Limited Use Exemptions For purposes of limiting tax exposure, customers Requirements and Useful Life Turns to Consider sometimes provide Exemption certificates Each taxing authority has its own specific Hawaii Resale Certificate With the to their suppliers with specific instructions requirements relating to when Exemption exception of use tax related to imports not to exempt certain items associated certificates or other acceptable documents for sale or purchase for wholesale, Hawaii with the transaction because they don't are required, as well as any associated does not completely exempt sales for qualify as exempt, either because they expiration period or useful life of the resale.

7 Sales to a licensed retail, jobber or don't meet the requirements of a use- Exemption documentation. other licensed seller for resale purposes based Exemption or because certain are sales at wholesale for general excise items or a certain number of items will Generally speaking, if a seller doesn't tax purposes and are taxable at a reduced not be resold. This approach can become impose tax on a taxable transaction, then rate of problematic for sellers to administer but an Exemption certificate must be obtained it is something that they may have to deal in lieu of collecting the tax on or before Washington's New Resale Exemption with from time-to-time to better meet the date of sale. There are of course some Policy Effective January 1, 2010, the their customers' demands. exceptions to this general rule that allow state of Washington stopped accepting grace periods for obtaining the needed traditional self-issued resale certificates Home-state Exemption Certificates Exemption documentation, which may to support a wholesale sale to resellers.

8 Associated with Drop-Shipment extend as much as 90 days. It is noteworthy In the place of the traditional resale Transactions For the majority of states, to mention that it is not unusual for taxing certificates, a seller must obtain a copy of drop-shipment transactions are viewed as authorities to allow taxpayers additional a new state-issued Reseller Permit from resale transactions, and a high percentage time after missing Exemption certificates its resale customers. These new state- of those states allow the acceptance of a are identified during a sales tax audit. The issued Reseller Permits are available for seller's home-state resale certificates in additional time may be as much as 120 retailers, wholesalers and manufacturers lieu of one from the ship-to state. days, or perhaps even longer if the seller and have a useful life of either two or four Home-rule Localities Acceptance of State signs a statute of limitation waiver.

9 But as years. Businesses engaged in construction Exemption Certificates The general a matter of practice, this additional time activities can also obtain a new Reseller presumption that exists with most sellers should be viewed as an audit mercy on Permit, but the useful life is limited to a is that home-rule localities accept a state behalf of the auditor rather than an excuse period of one year. Businesses that make Exemption certificate to support the local not to have to obtain the needed certificate resale sales that don't qualify for a Reseller Exemption as well; however, this is not true at the time of sale. Permit will need to pay the tax associated in all cases. It's important to know which with their purchases and afterwards claim ones do accept a state certificate and which It is also noteworthy to mention that under deductions on their sales tax returns ones require their own.

10 The Exemption provision of the Streamlined or request refunds directly from the Sales and Use Tax Agreement (SSUTA) that Department of Revenue. In lieu of the new governs the twenty-three Streamlined Reseller Permit, a Streamlined Sales Tax Sales Tax states, sellers have 90 days to Exemption Certificate can still be accepted. obtain the needed Exemption certificate or the applicable Exemption certificate Single Use vs. Blanket Exemptions . data elements that are required. After the As a practical matter, most customers 90 day period, the seller may have up to that provide their vendors Exemption 120 days upon request from the member certificates do so under a blanket state to either prove that the transaction approach and then self-assess use tax on was exempt by other means or obtain an any items that don't apply; however, there Exemption certificate from the purchaser are occasions in which there is a need to in accordance with the member state's be able to manage a single-use Exemption good-faith provision.