The Streamlined Sales Tax Audit Committee recently issued guidelines for the acceptance of exemption certificates in Streamlined Sales Tax (“Streamlined”) states. The guidelines discuss good-faith acceptance and the timeframe for obtaining certificates.
Streamlined rules require that states honor valid exemption certificates (i.e., completed certificates accepted in good faith) and relieve sellers of liability on exempted transactions. Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming are member or associate member states.
To be “valid,” an exemption certificate must include the purchaser’s name, business address, tax identification number, a description of the purchaser’s business, and the reason for the claimed exemption. Streamlined rules provide that a completed certificate will relieve the seller of liability if a seller accepts the certificate at the time of sale, up to 90 days after the sale, or before a Streamlined state begins its audit of the seller.
Streamlined allows sellers to accept blanket exemption certificates from purchasers with whom they have recurring business relationships. A completed blanket exemption certificate relieves the seller of tax on all of the purchaser’s exempt purchases. However, if a purchaser waits 12 months between purchases, the seller must obtain a new certificate.
If a seller does not get a certificate until after he is under audit, the auditor will determine whether the certificate was accepted in “good faith.” Good faith means that the claimed exemption was valid on the date the transaction was completed, and both the purchaser and item purchased were eligible for the exemption. In addition, an auditor will apply the good-faith standard to corrected certificates obtained to document exempt transactions that occurred more than 90 days before the beginning of the audit.
A certificate is not valid if it is incomplete or the purchaser claimed an exemption that did not exist or did not apply to the item purchased. In addition, an auditor may determine that a certificate is not valid if the seller could not have reasonably believed that the purchaser was entitled to the claimed exemption.
Further, if an auditor believes that a seller knew or had reason to know that information on an exemption certificate was materially false, the transaction will remain in the audit, provided the state can prove that the seller knew that the purchaser falsely claimed the exemption.
The Streamlined guidelines provide that a seller has 120 days from the date the state requests proof of claimed exemptions to provide completed exemption certificates or other information to document claimed exemptions. If a seller does not provide the requested documentation within the 120 days, the seller is liable for tax on any undocumented exemptions.
The Streamlined exemption certificate is available at www.streamlinedsalestax.org, but a seller may also accept a state-issued exemption certificate, a previous version of the applicable state’s exemption form, or a Uniform Sales and Use Tax Certificate available at www.mtc.gov.
To avoid tax assessments on exempt sales, a seller should have a reasonable knowledge of available exemptions and request completed certificates before an audit. In addition, a seller should ensure that exemption certificates include all required information.
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