Michael Mistretta, CPA
If you’re a retailer, you are probably aware of your sales tax collection obligation to your state. If you’re a consumer, you expect to pay sales tax when you make a purchase.
What you might not know is that there are a multitude of transactions that are tax-exempt and not subject to sales tax, but due to the varying rules that surround them, sales tax-exempt transactions can be more burdensome to manage than collecting sales tax. Both retailers and buyers need to accommodate these unique rules to limit their sales tax liability.
What is a Sales Tax Exempt Transaction?
It is important to note that all retail sales of tangible personal property are subject to sales tax unless otherwise exempt, not vice versa. In other words, as a seller, you need to default to collecting tax on a sale unless the buyer can prove that the transaction is exempt. This is generally accomplished by a sales tax exemption certificate that is unique to each organization. It is the seller’s responsibility to retain each certificate for each person they transact with.
Examples of Sales Tax-Exempt Products
Examples of products and services that can qualify for exempt-status include medical services, food and beverages, digital products, utilities, clothing, publishing, telecommunications, vending machine items, and government services. However, be aware that an exempt item in one state may not be exempt in another and it is ultimately the seller’s obligation to be informed.
Selling for Resale – Resale Certificates
In general, products purchased for resale are exempt from sales tax. A resale certificate is a specific exemption certificate that releases a seller from its tax collection duties. It is important for a seller to confirm, even if a resale certificate has already been acquired, the intended usage of their products for each sale.
In a scenario in which a retail buyer uses the product internally, the seller may be liable for the tax if it is reasonable that they had knowledge that the sale was not for resale.
Retention and Record-Keeping for Sales Tax Exemption Certificates
While some jurisdictions’ exemption certificates can be held indefinitely, others expire after a set amount of time. The burden of retention and record-updating falls upon the seller.
To alleviate the burden, the Multistate Tax Commission (“MTC”) developed the Uniform Sales & Use Tax Exemption Certificate. This blanket certificate, accepted by nearly forty states, simplifies the retention requirement for sellers by reducing it to one certificate per customer. The form, as well as its per-state instructions, can be found on the MTC website. Additionally, there are several software programs available to the public that track taxability of customers.
Taking Action Post Wayfair
Following the outcome of the Wayfair Decision, staying to-date on sales tax law is more consequential than ever. To learn more about retail sales tax exemptions and how they apply to your business, contact the SALT experts at Freed Maxick CPAs. Call me at 716.847.2651 for a discussion of your situation or click on the button for a “Contact Us” form.