There is a lot of confusion surrounding the use of exemption certificates. This article provides the basics on how to properly use exemption certificates to avoid future headaches related to audit.
Purpose of Exemption Certificates –
According to sales and use tax statutes, all sales are subject to tax unless proven to the contrary. How does a seller prove that their customer indicated their purchase qualified for an exemption? By providing an exemption certificate for the seller to keep in their records.
When Wisconsin became a member state of the Streamlined Sales and Use Tax Agreement, Wisconsin was required to adopt certain definitions and rules. One important change provided sellers relief from liability to collect sales tax under certain conditions. If a seller obtains (and maintains) a fully completed exemption certificate from its customer prior to or within 90 days of the sale, the seller is relieved of liability for collecting sales tax on its sale. This means, the seller does not have to verify the accuracy of the exemption being claimed by its customer and an auditor does not have the ability to question the exemption certificate during an audit of the seller.
“Fully Completed” Exemption Certificate –
A fully completed exemption certificate contains the following information:
- Purchaser’s name
- Purchaser’s address
- Type of business purchaser is engaged in
- Type of products/services purchaser is buying exempt
- Reason for exemption
- Number if claiming resale, exempt status (CES #), Native American Tribe, or LC #
- Signature (if providing paper certificate to seller)
- A seller must maintain proof of electronic receipt (e.g., email) if obtained electronically to verify date obtained and authentication of receipt from purchaser (in lieu of signature)
- Date – not required by statute but necessary to substantiate certificate was received within 90 days of the sale.
Note: Seller’s name and address is not required to be provided in order for the certificate to be considered “fully completed.”
What a Seller Needs to Know –
- Exemption certificates must be maintained and available for review at the time of audit. If a seller must request a certificate from its customer during the audit, the seller will not be able to meet the 90 day requirement to be relieved of liability for the sales tax. An auditor can review the certificate to ascertain whether or not the exemption claimed by the purchaser is reasonable. If the exemption claimed is deemed to be unreasonable, the seller will be assessed the applicable sales tax, interest, and possible penalties related to the sale.
- In order for a seller to substantiate an exempt sale, the invoice bill to information and the exemption certificate purchaser information must match.
- When selecting which account to invoice your customer, make sure it matches the purchaser information listed on the exemption certificate provided. If Joe Johnson is purchasing a part for farming equipment and provides the exemption certificate for Happy Cows Farm – the account name and bill to on the invoice should be “Happy Cows Farm” and not “Joe Johnson.”
- Do not use the general account “Cash Sales” to record exempt sales to customers. “Cash Sales” cannot be reconciled with purchasers’ exemption certificates. Under audit, you will not be able to substantiate exempt sales and will be assessed sales tax, interest, and possibly penalties for any exempt “Cash Sales.”
- A purchaser cannot claim the exemption of a different entity.
- A general contractor cannot claim the exempt status of its customer on an exemption certificate to its subcontractor.
- An excavator company cannot claim a farming exemption of its owner to purchase equipment for the excavating company.
- Exemption certificates do not expire. However, if your customer’s business changes names or ceases operations, be sure to request updated information for your files.
- If you have a business procedure to request new exemption certificates every 2 years, be sure to maintain the original certificate you received in your files. Remember, the certificate must be received (dated) within 90 days of the original sale. If you replace certificates with newly dated certificates, you will not be able to meet the requirements to be relieved of liability for collecting sales tax.
- Keep all exemption certificates in a separate file that is not put into storage with your invoices. Wisconsin sales tax audits can go back 4-6 years and it is difficult to find certificates filed away in the individual customer’s files. If the exemption certificate is single-use, identify what invoice, purchase order, or job number it relates to and keep it filed with the continuous use exemption certificates.
- Exemption certificates can be kept as physical (paper) files or scanned in and maintained in electronic files. Remember, for certificates obtained electronically from your customer, to also maintain the email in which the certificate was provided.
What a Purchaser Needs to Know –
It is important that a purchaser understands their responsibility and liability when providing an exemption certificate to its seller. In signing the exemption certificate, the purchaser is affirming that the information on the certificate is accurate and that they know their purchase qualifies for the exemption claimed. Someone who purchases an item exempt and then uses it in a taxable manner is liable for use tax on the original purchase price of the item. A purchaser who intentionally provides false information on an exemption certificate to its sellers can face a penalty of $250 per certificate, in addition to applicable tax, interest, and penalties. While a seller can be relieved of tax liability in certain circumstances, the purchaser can always be held liable for use tax, interest, and penalties.
Understand What Exemption You Are Claiming –
If you are providing an exemption certificate to your seller, understand what taxable products or services you are claiming to be exempt purchases and the criteria required to qualify for that exemption.
- A general contractor hires a subcontractor to provide taxable services as part of the general’s contract with an exempt entity. The general contractor is reselling the subcontractor’s taxable services to its end customer. The exemption certificate provided by the general contractor to its subcontractor will likely claim “Resale.” The general contractor is NOT claiming its customer’s exempt status.
- A campground purchases a golf cart without tax, for resale, to be used solely to rent to guests. After a few years, the campground purchases a new golf cart for guest rentals and begins using the older golf cart in the business to haul ice and firewood. The old golf cart is now used in a taxable manner and no longer qualifies for resale. This means the campground must remit use tax on the original purchase price of the old golf cart.
- A general contractor is purchasing real property construction activities from its subcontractor as part of a contract for a church. The general contractor understands that its contract and the work by the subcontractor meets the building materials exemption. The building materials exemption provides an exemption for the purchase of materials and taxable services consumed in real property construction activities. The sale of a real property improvement by the subcontractor is not taxable, so the general does NOT provide the subcontractor an exemption certificate. However, the general should pass on information about its end customer (i.e., the CES information of the exempt entity) so that the subcontractor can substantiate purchasing its materials exempt that are consumed in the real property construction activities. The general does NOT pass its customer’s exempt entity information to the subcontractor by filling out an exemption certificate.