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Exemption AdministrationTraining

Prepared by theStreamlined Sales Tax Governing Board

Audit Committee

Prepared January, 2011

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Streamlined Sales and Use Tax Agreement (SSUTA)

States adopting the SSUTA are required to change the administration of sales tax exemption certificates to comply with the provisions of SSUTA.

Sellers that comply with the exemption certificate provisions of SSUTA are relieved of any liability for an otherwise taxable transaction.

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Exemption Certificate Requirements (Member States)

A member state may require an identification number be presented by a purchaser to the seller at the time of the sale to claim exemption.

Member states may allow direct pay permits, exemption certificates, or another means as proof of exemption that does not burden sellers.

A member state must post the streamlined sales and use tax exemption certificate on its website.

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Exemption CertificatesAre used to purchase items exempt

fromsales tax.

Satisfy the seller’s responsibility to prove a sale was not taxable.

Come in various forms and versions.Example of the SSUTA Certificate of

Exemption is on the next slide.

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SSTGB Form F0003, SSUTA Certificate of Exemption

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Other Exemption FormsState issued exemption certificate/permitPrevious versions of state exemption formsLetter of Exemption issued by some statesUniform Sales & Use Tax Certificate –

Multijurisdiction, issued by the Multistate Tax Commission

Other documentation acceptable to the state.

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Fully Complete Exemption Certificate Requirements

Purchaser’s name and business address,Purchaser’s identification number as follows:1.State sales/use tax ID number or SST ID #;2.If none, the state sales/use tax identification

number issued by another state and the name of the state;

3.If none, the Federal Employer Identification Number;

4.If none, then a valid state issued driver’s license number and the state of issue, or

5.If none, a non-tax state issued identification number and the state of issue

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Fully Complete Exemption Certificate Requirements

Description of the purchaser’s type of business or organization using the business type code on the exemption certificate, and

Reason for exemption using the code on the exemption certificate.

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Fully CompletedExemption Certificates

The fully complete standard applies to exemption certificates received:- on the date of the sale,- received within 90 days after the date of the sale, or- on file prior to the beginning of the audit.

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Fully Complete Exemption Certificate Requirements

The seller’s name and address are not required by law.

Do not consider these fields when determining if the certificate is fully complete.

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Handling Exemption Certificatesin an Audit

The “at the time of sale” requirement will be considered met if a fully completed certificate is received within 90 days after the date of the sale or is in the possession of the seller prior to the start of the audit.

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Invalid Exemption Certificatesthat are Fully Complete

If the purchaser provides a fully completed exemption certificate to the seller within 90 days of the sale, the state auditor must accept the certificate.

If the state auditor believes the exemption claimed is invalid, obtain as much information as possible about the transaction and follow applicable procedures for possible assessment to the purchaser.

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120-Day Rule

Within 120 days after receiving a request for substantiation of exempt sales from a member state, a seller with missing or incomplete exemption certificates at the time an audit begins must provide:

fully completed exemption certificate taken in good faith from the purchaser, or

other information acceptable to the state establishing that the transaction was not subject to the tax.

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120-Day Rule

Request missing and incomplete certificates early in the audit process.In the case of a sales sample, the 120 days does not begin until the seller has been notified of the sample.

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120-Day Rule

If statistical sampling is used, the 120-day period does not begin until the seller has been notified of the transactions in the sample. If a block sample is used, the 120-day period does not begin until the seller is notified of the months or alphabetical vendor files that will be reviewed.

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Incomplete and MissingExemption Certificates

Request the taxpayer obtain complete certificates to replace incomplete certificates.

If no certificate is on file, treat the sale as taxable until a valid certificate is provided.

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Good Faith StandardsUse “good faith” standards when

reviewing exemption certificates that are:received after the audit begins incomplete and replaced with

new exemption certificates received after the audit begins if the sales occurred more than 90 days prior to the start of the audit

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Good Faith Standards

“Good faith” means that the exemption claimed on an exemption certificate received within the 120 days of notice to provide must be:

statutorily available on the date of the transaction in the jurisdiction where the transaction is sourced,

applicable to the item being purchased, andreasonable for the purchaser’s type of

business.

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Relief from Tax LiabilityThe seller is relieved of any tax liability for an exempt transaction if it provides the exemption certificate or acceptable exemption information within the 120 days of notice.Exception: Liability is not relieved even if received within 120 days of notice if:

the seller had knowledge or had reason to know that the information provided was materially false, or

the seller knowingly participated in activity intended to purposefully evade the tax.

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Burden of Proof

The state must establish that the seller had knowledge or had reason to know at the time the information was provided that the information was materially false for a transaction to be considered taxable when an exemption certificate has been provided within the time periods specified.

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Handling Exemption Certificatesin an Audit

If an exemption certificate was not received “at the time of sale”, examine the validity of the certificate.

A certificate can be considered invalid if:- Not complete- Exemption claimed does not exist- Not reasonable for the seller to believe that the purchaser is entitled to the exemption.

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Handling InvalidExemption Certificates

If determined that an exemption certificate obtained more than 90 days after the sale is invalid, do not accept the certificate and consider the sale taxable.

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Blanket Exemption CertificateA blanket exemption certificate received “at

the time of sale” from a purchaser with whom the seller has a recurring business relationship relieves the seller of any applicable tax on transactions with that purchaser.

A state may not request the renewal of or updates to information on blanket certificates.

A recurring business relationship exists when a period of no more than twelve months elapses between sales transactions.

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Drop Shipment Rule

In the case of drop shipment sales, a state must allow a third party vendor (e.g., drop shipper) to claim a resale exemption based on an exemption certificate provided by its customer/re-seller or any other acceptable information available to the third party vendor showing the sale qualifies for a resale exemption, regardless of whether the customer/re-seller is registered to collect and remit sales and use tax in your state.

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References and ResourcesInformation based on the Streamlined Sales and Use

Tax Agreement – Section 317 – Administration of Exemptions

Section 317.1 – Simplified Administration Process

Form F0003 – Certificate of Exemption

(Both items are found at www.streamlinedsalestax.org )

Uniform Sales & Use Tax Certificate - Multijurisdictioncan be found at www.mtc.gov

(Select resources and forms)