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How Manufacturers Deal with Missing Sales Tax Exemption Certificates

What should a manufacturer do if they cannot obtain a sales tax exemption certificate from a customer for an exempt sale?  First, when a sales tax exemption certificate cannot be obtained from a customer, the manufacturer has no choice, they must charge the applicable sales tax. But what happens if the customer does not pay the sales tax? Then the manufacturer has a couple of options.  These options vary from state to state, as all tax laws do.  But here are a couple scenarios that some states follow. 

For manufacturers that operate on an accrual system, where the tax has already been remitted to the state, they can submit a refund request to the state.  Include the customer invoice and documentation showing that the customer short paid the tax.  Make sure to keep all back-up documentation where you have tried to collect the tax from the customer!  It may or may not get refunded - it depends on the state.

If a cash system is in place, sellers often report the sales as exempt on the sales tax return.  Supporting documentation, as well as proof that the customer short paid the sales tax should be kept for audit documentation.  It may be the auditor's discretion whether or not to impose the tax to the seller, in the event of an audit.

Most importantly, a conversation with the customer is necessary to determine why they cannot provide exemption documentation.  And then take all steps necessary to prevent absorbing the tax on their behalf or creating an exposure in an audit.

For more information about exemption certificates, view this on-demand webinar from Cherry Bekaert --Exemption Certificate Management Best Practices: How to Create a Proactive Process.



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Lauren Stinson, CMI
Written by Lauren Stinson, CMI

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