Tax alert

Denied resale exemption is no adventure movie

Mar 08, 2023
Business tax State & local tax Indirect tax

Executive summary: Taxpayer denied refund on sales tax paid on resale transactions

Recently, the District of Columbia Court of Appeals issued a decision denying a taxpayer’s sales tax refund request for failing to provide the vendor with a resale certificate at the time of the purchase. While some auditors may be flexible when it comes to collecting sales exemption certificates after the purchase was made, taxpayers (whether vendors or purchasers) should not rely on ‘post-purchase’ compliance. Whether a transaction exemption, such as resale or direct use in manufacturing, or an entity exemption, such as non-profit, taxpayers must be diligent with their exemption certificate compliance, including the understanding that the states impose remarkably different exemption procedures.  

Denied resale exemption is no adventure movie

No exemption certificate, no refund

The Indiana Jones quadrilogy (until the fifth movie premieres this summer) has countless memorable scenes thanks to witty dialogue and excellent direction. Perhaps one of the more memorable comes from the third movie, when Indiana, the protagonist of the series, disguises himself as a steward on an embarking airship. His task becomes one of collecting tickets while following the movements of the baddie looking for him and his father. When the baddie approaches, Indiana asks for his ticket before tossing him out of the compartment on to pile of luggage 30 feet below. He turns around to the crowd of stunned passengers and claims “no ticket” causing the confused passengers to frantically wave their tickets into the air.  

Less dramatic but equally important is adhering to the correct sales tax compliance processes when claiming exemption. A recent decision out of the District of Columbia demonstrates why compliance is so critical. The taxpayer paid approximately $1,000,000 in sales tax for purchases of prepared meals that were resold. A resale exemption certificate was not provided by the taxpayer at the time of purchase. A refund request followed which was denied by the District’s Office of Tax and Revenue. 

On appeal, the court addressed 11 arguments put forth by the taxpayer, several of which involve statutory interpretation and structure of the relevant provisions requiring a resale certificate at the time of purchase. The court was unconvinced by those arguments. Another argument involved double taxation because the taxpayer paid tax on its purchases and presumably collected tax on the sales of those same purchases. Again, the court was unconvinced finding that the consequence of the double taxation was attributable to the taxpayer’s failure to properly comply with the exemption provision. The court also rejected the claim that it was “absurd” to require the taxpayer to pay tax on transactions that were exempt because, as the court wrote, it was not absurd for a legislature to determine that sales tax exemptions be supported at the time of purchase. 

Ultimately, ‘X’ failed to mark the spot for this taxpayer because a resale certificate was not provided at the time of purchase. 

Exemption certificates and compliance matter

A sales and use tax exemption certificate is intended to evidence why the party responsible for the collection of the tax, generally, the vendor, did not collect the sales or use tax on a transaction. Although in this case, the taxpayer was requesting a refund after paying the tax on the original purchase. The certificate is collected in lieu of the tax and maintained in the records of the responsible party. Generally, vendors that receive an exemption certificate in ‘good faith’ are relieved of any liability regarding whether the exemption claimed was appropriate given the facts and circumstances of the purchaser. However, that is not always the case, and vendors must still review the certificate for baseline compliance.

In most jurisdictions, the recipient of a certificate must verify that the format is correct, the certificate is signed and dated (i.e., no bad dates), a specific exemption is indicated, and all purchaser information is complete. Some certificates may only be used for specific periods of time and must be reissued to the vendor annually or otherwise periodically.

Exemption certificate maintenance is increasingly important for vendors and purchasers in the post-Wayfair sales and use tax environment. Exemptions and exemption compliance vary widely among the states, and both the vendor and purchaser may be unaware of how exemptions or exemption certificates are treated as they enter new jurisdictions. Proper exemption certificate maintenance must be considered a routine component of sales and use tax compliance and as a proactive controversy preparation best practice.

‘No certificate’ may not result in being thrown out of an airship, but it could result in losing what amounts to low-hanging sales and use tax savings. Taxpayers with questions about exemption certificate maintenance or best practices should speak to their sales and use tax advisers. 

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