Taxpayers Beware—Without an Exemption Certificate, Your Sales Might Not Be Exempt

This article was originally published in the Journal of State Taxation.

In the U.S., businesses with nexus in a state must charge their customers sales tax on taxable transactions unless, and until, the seller accepts the proper exemption documentation from the purchaser in good faith. States generally provide many full or partial exemptions; the party claiming the exemption has the burden of demonstrating compliance with the law. Sales lacking proper exemption certificates could be deemed taxable. 

Issues with documenting exempt sales can lead to large tax audit assessments or create potential exposures. Following the 2018 Wayfair decision, vendors have much broader economic nexus footprints and should analyze whether to charge sales tax or, with exempt transactions, to emphasize collection and validation of exemption certificates to document tax-exempt sales. This article by BDO professionals illustrates through recent cases the immediate need to improve exemption certificate documentation and retention policies for sales tax purposes, highlights overlooked nuances and areas of prevalent noncompliance, and provides best practice recommendations for sellers and buyers.