Many entrepreneurs and business professionals understand how to start a business but soon find themselves ill-prepared to handle the many requirements of administering a state’s sales tax exemptions. One of the most important elements of ensuring a business is in compliance with state sales tax laws and regulations is the proper administration of exempt sales. Why is the administration of exempt sales so important to a business? Because if the transaction is not handled properly, the business could be on the hook for any and all assessed tax, penalty and interest levied by a state’s Department of Revenue; and that is an unexpected and costly expense that any business can do without.Not obtaining a certificate of exemption from the customer, failing to have an accounting system that can tie the exempt sales invoice to the customers exemption certificate or not retaining exemption certificates for state audit purposes are all issues that can cause a state’s Department of Revenue to assess tax, penalty and interest against a business.
Has your business put the proper controls and procedures in placer to administer a tax exempt sale to a local non-profit group or government official who has stated they are not required to pay tax on the items they wish to purchase? You may think that since the customer is telling you they are entitled to a sales tax exemption, it must be true, or that it is better to go ahead and exempt a sale from tax than to lose a good customer. However, you would be incorrect and possibly creating a serious liability for the business. States have very specific laws and regulations pertaining to who is entitled to claim exemption from tax and how those sales are to be documented. In addition, many states limit the products that may be purchased tax exempt to specific categories depending on the type of exemption being claimed.
In many states, the business is currently responsible for establishing if the purchaser is entitled to a state legislated sales tax exemption. Ensuring a customer qualifies to make an exempt purchase and that the sales is properly documented are crucial to avoiding an assessment in a state sales tax audit.Also, a business should be aware of what goods may be purchased tax-free under the various state sales tax exemptions. Non-profit groups, government entities, agricultural producers, and other retailers are all generally entitled to claim exemption from sales tax on qualifying purchases. However, a person claiming a sales tax exemption for government officials may not purchase a big screen television exempt from tax for their personal use, but may purchase a piece of office furniture to be used in an official government capacity when properly completing a state’s exemption certificate for government entities. Additional detailed information can be found by reading A Guide to Sales and Use Tax.