Manufacturers: Do Your Vendors Have Valid Exemption Certificates?
Many manufacturers think that everything they purchase is exempt from sales and use tax; however, this is a common misconception. Although many states are generous with the exemptions they offer to manufacturers, unfortunately, everything that is purchased by manufacturers will not be exempt from sales and use tax. So as a manufacturer, how do you take advantage of the sales tax exemptions in your state?
First, know which exemptions are available in your state. Second, send vendors the required documentation to substantiate the exemptions. Otherwise, the supplier will be obligated to charge tax if they have nexus in your state.
Exemption Certificate 101
In most states, the required documentation is in the form of an exemption certificate. In some states, the certificate is issued by the state. For other states a form is filled out by your company and sent to the vendor. Either way, the vendor will then keep this certificate on file to document why they have not charged your company sales tax.
Most exemption certificates must be:
• Fully completed, including, the name, address, sales tax number and signature of the taxpayer;
• On the correct form for the particular exemption;
• For an exemption that was available when the purchase was made; and
• For an exemption that applies to the item being purchased
Also, most states require that an exemption certificate be taken in “good faith”. This means that the seller needs to ensure that the exemption certificate’s use is appropriate and that it makes sense.
Types of Exemption Certificates
There are also several different types of exemption certificates. Each state is different but here is a list of just a few of the different types:
• Resale Certificate
• General Exemption Certificate
• Manufacturers Exemption Certificate
• Utilities Exemption Certificate
• Uniform Sales and Use Tax Exemption Certificate (developed by the MTC)
• Streamlined Sales Tax Agreement Certificate of Exemption (developed by the Streamlined Sales Tax Governing Board)
Which certificate should you send to your vendor? This depends on what is purchased and how it will be used. For example, if purchasing raw materials for a product, send the vendor a resale certificate since these items will essentially be resold with the product. Some states have an exemption for machinery and parts, so most likely a manufacturer’s certificate is needed for these types of purchases that qualify for exemptions.
Direct Pay Permits
Many manufacturers have direct pay permits that allows them to purchase most items for the plant tax free. However, this puts the burden of making sure sales tax is paid correctly on the manufacturer, so make sure your staff is up to date on all of the sales and use tax laws. They will need to be making the tax decisions and ensuring that the correct amount of tax is being paid.
Also, a direct pay permit is not allowed to be used for every purchase. They are usually not permitted to be used for motor vehicles, enumerated services and many other transactions which are documented in the state statutes. And direct pay permit holders must keep excellent records because it is their responsibility to prove that the correct use tax has been paid.
Risks of Invalid or Missing Certificates
So what is the risk if a vendor does not have an exemption certificate on file or the exemption certificate is invalid? Do not assume that the certificate you sent to the vendor several years ago is still valid. What if it has expired? Your vendor could be liable for tax down the road in the event they are selected for a sales tax audit. This could result in them sending you a bill for that tax a year or two after the actual purchase.
Another very likely scenario could be that your vendor did not have nexus in your state and now suddenly does. Many vendors are facing this challenge in today’s post-Wayfair world. Even if in the past your supplier did not charge sales tax, now they could be including it on your invoices. If this change goes unnoticed, it could lead to thousands of dollars in overpaid sales tax. It may even result in double payment of tax! And once the tax has been paid to the state, it may take a long time to recover the tax.
A reverse audit is a great way to identify overpayment problems and train staff to identify errors and follow more efficient procedures. Click here to learn more about Cherry Bekaert’s reverse audit services.
To help determine if your company can benefit from a reverse audit, click below to see if your staff can correctly answer these six sales and use tax questions for manufacturers. Wrong answers are red flags that sales tax may be overpaid.