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Sales Tax Exemption Certificates: Get ’Em While They’re Hot

Sales taxes are tricky. Collect and remit tax from everywhere you sell and there's no cost to your business—or at least no direct, out-of-pocket cost. The customer pays the tax.

The indirect cost of the time to administer the sales and use tax collection process can be significant, but the cost of not filing can be even greater.

If you are audited and are found to owe state sales tax, states will require your company to pay penalties and interest on the tax—in addition to paying the sales tax that should have been collected from your customers. And, because your business did not file a return, the statute of limitations has not started to run, and the state can go back to when your company first had nexus.

Example: A business delivers $1 million of goods into Wisconsin without charging sales tax. If Wisconsin audits the business, the potential liability is $50,000 ($1 million x 5% Wisconsin sales tax rate). And, because the business hasn't been filing Wisconsin tax returns, Wisconsin may go back to when the company first operated within the state and charge penalties and interest in addition to the tax the company's customers should have paid.

Biggest cost of not filing: the sales tax itself

If your business had filed state tax returns, you would have collected the tax from your customers. But, by the time the state audits you, your customers might have left or gone out of business—or you might be unwilling to compromise future sales for the sales tax on prior sales.

Most states will sample your sales activity in the state and use this error rate to apply to your total sales. Thus, you might not be able to directly determine how much of the tax liability relates to a specific customer. This sampling technique causes an audited business to pay the state sales tax that should have been paid by its customers. If a company has a low profit margin on sales, the company might even lose money on those sales.

To file or not to file?

How do you weigh the cost of compliance against the exposure for not filing? A relatively simple solution can minimize the exposure. It requires minimal administrative time, but provides your business considerable insurance if a state requires a return in the future.

The solution: Collect exemption certificates from every customer, even if you're not filing sales tax returns in a state. We recommend adding "obtain exemption certificate" to the new customer acceptance process. If the customer does not provide you with an exemption certificate, you need to decide whether the potential exposure for sales tax outweighs the administrative costs of filing sales tax returns in that state.

Filing sales tax returns is a time-consuming process. It's understandable that companies do not want to file, especially if their sales are exempt. However, by collecting sales tax exemption certificates upfront, you can minimize your company's exposure to noncompliance.

Questions about filing state income tax returns?
Contact Jason Parish at 312-980-2959.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.