Sales Tax Exemption Certificates
For companies that have the responsibility of collecting resale certificates or other types of exemption certificates, there are a couple of things that need to be checked to prevent audit assessments. Michael Fleming, the host of the Sales Tax and More podcast, highlights these items this week.
Michael is the founder of Sales Tax and More and is one of the country's leading authorities for state tax issues like consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers. He is a writer, speaker, and regularly presents on webinars.
In this episode, Michael Fleming is joined by Dr. Jeremy Weisz to talk about large audit assessments, resale and exemption certificates, and the importance of completely filled certificates.
Here’s a glimpse of what you’ll learn:
The number one cause for large audit assessments
Why companies could be missing certificates
How a missing certificate can greatly impact a company
How to prevent large audit assessments
Do exemption certificates expire?
Should companies include exemption certificates in their procedures?
Resources Mentioned in This Episode
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to sales tax and more, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
[0:26] Mike: Hi, Mike Flemming here I am the founder of Sales Tax and More and today's host for the Sales Tax and More Podcast where we talk about everyone's favorite subject, which is of course sales tax. It is everyone's, yeah, absolutely. And I've got Jeremy Weiss, that was him chiming in there. And he's done thousands of interviews with successful entrepreneurs, CEOs. But today, we're gonna flip the script. We're gonna have him interview me.
[0:55] Jeremy: Michael, thank you for having me. A brief introduction for you, Michael forming. If you don't know him, I consider him, a lot of people consider him one of the USA’s leading authorities when it comes to sales tax, and the episode is brought to you by sales tax and more. They assist companies and their trusted advisors with their sales tax needs. So they offer consulting and research registrations returns and much more. And over the years, they've assisted thousands and thousands of sellers, both foreign and domestic with their sales tax issues in the United States and Canada. You can go to sales tax imore.com for more information and check out past episodes there. They're really interesting some interesting case studies and today we are going to talk about the number one cause for large audit assessment. And what would that be? Miko, tell me about that.
[1:47] Mike: Okay, so for companies that have a responsibility to collect resale certificates or other types of exemption certificates, missing or invalid certificates are the leading cause of large audit assessments. And the reason is, is simple. Number one. If a sale is not properly documented, a sale for resale is not properly documented, then the state doesn't recognize it as a sale for resale. So you're thinking that you have all of these sales that you know, you don't need to be collecting tax on, but you're not properly documenting them. And you get audited, and the state says, okay, you owe tax on all of these transactions.
[2:34] Jeremy: Hmm. Why are they missing them?
[2:37] Mike: lots of reasons. Sometimes it's just, you know, not understanding where they need to collect them. Or even if they do collect them, maybe it's not completely filled out. Maybe it's not signed, maybe it's not dated, maybe it's on the wrong state form. So it's just a lack of knowledge as to what they should be accepted in. For some companies, it's not just accepting it, but someone's got to validate it make sure that it's actually something that would survive an audit.
[3:08] Jeremy: Hmm. So walk me through an example because some people obviously missing and people doing this wrong and they don't even realize they're doing it wrong. Walk me through an example. And you could D identify whether it's like a grocery store or a, you know, a practitioner's office of the type of business they are, what they were selling, and what they should have been doing that they weren't.
[3:31] Mike: Yeah, this I've got a good example here, how even one missing certificate can impact you greatly. This was a company I was involved with a number of years back and they were building highways of all things so you wouldn't normally think that they had a lot of certificates. No, but they were selling off old pieces of equipment and in lots of things that they no longer needed. Haha. So they got audited by the state of Texas it's about a three and a half million dollar audit and a good chunk of that was due to missing certificates. And another part you know was used tax, and use tax is the second leading cause we can talk about that in another podcast. But the certificates the state of Texas, you know, gives you 60 days to go out and correct any mistakes. And we were able to find all of the certificates except for one, you know, we were calling companies. I mean, we worked overtime to get these certificates we were extremely successful. And we were really good. We found some refunds put them inside of the audit, we took care of some of the US tax issues and we got this audit down to a ridiculously low number from three and a half million dollars except for this one certificate and we couldn't find them anywhere. We did skip tracing, the company looked all over for him, it was an individual, and they had sold a piece of earthmoving equipment to them. And the tax on it should have been about $8,000. And no one wants to pay $8,000. But after we exhausted all of our efforts, we tried to get this one certificate excluded from the sample. And by the way, that's important, got to remember that $8,000 doesn't represent just $8,000 because most audits nowadays are done on a sample basis. So that affects your error percentage and it's, you know, pulled out over the entire population. So that $8,000 actually was a $270,000 error. And that's what they had to add to the final audit assessment for that one missing. So, you know, we couldn't get it, you know, excluded from the sample because we've used up all of our favors in this audit and they had enough issues that they just wouldn't. So where they went from paying virtually nothing, they were extremely happy with us, by the way, we got them down from 350, excuse me, 3.5 million. But that one missing certificate was $270,000.
[6:22] Jeremy: So to prevent that, Michael in the future going forward, just anything that you purchase you ask for the resale certificate is that?
[6:31] Mike: Anything that you sell to someone who's selling for resale? I put it this way. All of your sales. Remember that if you have nexus in a state, you need to collect the tax. And if you're not going to collect the tax, you need to collect some sort of exemption certificate in lieu of the tax. And a resale certificate is a type of an exemption certificate. So you need to get that from all of your customers not on every transaction, you know if they're giving you a blanket, certificates. That's okay. So long as they're continuously doing business with you. I mean, you should update them as a best practice every three or four years. But the important thing is making sure it's completely filled out, making sure it's signed, making sure it's dated, making sure it's on the correct state form. Those are some of the bigger issues out there. I mean, you know, a lot of times an auditor will kick it simply because it's not signed. How hard is it to have someone you know, when you're collecting this certificate, validating make sure it's signed? I mean, just make sure that all of the questions on there are completely filled out.
[7:39] Jeremy: Anything else that people should know about, the exemption certificate?
[7:44] Mike: Yeah, I mentioned as a best practice, most of the time exemption certificates don't have an expiration date, they don't expire. There are a few states where they do like Florida or Washington, but in general, they don't expire. However, a lot can happen in a three or four-year period. Maybe that certificate was valid when they issued it to you. But maybe the company sold or maybe they, you know, changed entity types and now they have a new sales tax number. Maybe they change states I had a situation where that happened. The old certificate was on file, they moved from Texas to Oklahoma. And you know that Texas certificate didn't work anymore, because everything was being shipped to Oklahoma. So certificates may be valid when you collect them. But a lot of things can happen in a three to four-year period. You want to be spot-checking or doing a total upgrade or at least every three to four years when it comes to certificates.
[8:47] Jeremy: Do you recommend like a business put that in their procedures or something like every three years check these specific exemption certificates are what do you recommend going forward for a company like this who kind of got burned?
[9:01] Mike: Yeah, absolutely. Number one, you have to have a process. And you know, part of that process is who's responsible for making sure the certificates get collected. Sometimes it's the credit department, sometimes it's the accounting department, sometimes it's the sales department. But someone's got to take responsibility for collecting the certificates. And then someone's got to be responsible for validating the certificates, making sure that they're completely filled out. And then as part of your policies and procedures, have them updated every three to four years.
[9:35] Jeremy: Thank you, Michael. So anyone who's interested, go to salestaxandmore.com listen to more episodes. I mean, if you're worried if you're like me, like, what the heck is he talking about exemptions because you probably should have him audit, or the company audit your account before someone who you don't want auditing your account to do it. You know, and have them go through and see what you're missing what you need. I imagine I mean, you know, so check out salestaxandmore.com for more information. Michael, thank you. This is too much to know like this is so much. So thanks for sharing.
[10:14] Mike: Well, thank you, and thank you for being with us.
[10:18] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.