What Is a Tax Exemption Certificate?
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- A tax exemption certificate is the form a buyer gives a seller to claim exemption from sales tax on purchases of otherwise taxable items. The seller keeps it as the record of the exempt sale, and a resale certificate is one kind, used when the buyer is purchasing goods to resell them.
Also called: Sales tax exemption certificate, Certificate of exemption
How it works
The Streamlined Sales Tax Governing Board publishes one exemption certificate that all 24 of its member states accept. The purchaser must complete every field and give the certificate to the supplier, not to the Governing Board or the states, keeping a copy.
The purchaser is responsible for being eligible and is liable for the tax, interest and possibly penalties if the purchase is not legally exempt. The seller is relieved of collecting the tax, even if the exemption proves improper, when the agreement's conditions are met. Among them: every field is completed, the certificate is provided at the time of sale or as the agreement otherwise allows, and the seller neither fraudulently fails to collect tax nor solicits unlawful exemption claims.
How an exemption certificate moves through a sale
The purchaser completes all fields and gives the certificate to the seller to claim the exemption.
The seller maintains records of exempt transactions, on paper or in electronic format.
With the certificate provided, the seller should not collect sales or use tax on that sale.
Sellers provide records of exempt transactions to member states when requested.
A certificate can cover one purchase, with the invoice or purchase order number on it, or act as a blanket certificate. A blanket certificate stays in force while the purchaser buys at least once in any twelve consecutive months, or until the purchaser cancels it.
Resale certificates and other exemptions
Resale purchases go on the same Streamlined certificate: the Governing Board tells purchasers making resale purchases which state ID number to provide on the exemption certificate. The instructions also cover entity-based exemptions, which depend on who the purchaser is, such as a charitable organization. Not every state allows every exemption on the form, and purchasers must check with each state for its requirements.
Resale rules differ by state:
- California: the certificate may be in any form, as long as it carries the purchaser's name and address, seller's permit number (unless it need not hold one), a description of the property, an explicit statement that it is bought for resale, the date and a signature.
- Florida: businesses registered to collect sales tax receive an Annual Resale Certificate, valid through December 31, for property or services they resell. It does not cover items the business uses itself, such as furniture, office equipment, computers or supplies.
- Illinois: purchasers can use Form CRT-61 or their own certificate, and certificates should be updated at least every three years.
Example
A Florida hardware wholesaler gets an order from a retail store: $4,000 of hand tools the store will resell and $600 of shelving for its own stockroom. The store provides its Annual Resale Certificate.
Florida's certificate is for property bought to resell, so it covers the $4,000 of tools. Florida says it may not be used for items the business uses itself, so it does not cover the $600 of shelving: $4,000 of the $4,600 order is covered and $600 is not. If the wholesaler documents the sale by keeping a copy of the certificate, Florida says to keep it for three years.
On Shopify
Shopify sets exemptions in the customer's tax settings: collect tax, don't collect tax, or collect tax unless exemptions apply, with the exemptions picked from a list. Tax-exempt customers aren't charged any tax at checkout, but they must check out with the email address on their customer account.
On plans that support Shopify B2B, the same settings apply to company locations, along with a tax ID field. If a store uses tax-included pricing, an exempt customer is still charged the full listed price.
How Uncap helps
Uncap's Shopify tax exemption setup guide explains that for a wholesale or resale B2B buyer with more than one purchaser, company location-level exemption, backed by a verified resale certificate on file, is what actually holds up as the account grows.
Sources
Frequently asked questions
How do I get a certificate of exemption?
It depends on the state. With the Streamlined certificate or Illinois Form CRT-61, the buyer completes the form; Florida instead issues an Annual Resale Certificate to businesses registered to collect sales tax.
Is a W9 the same as a sales tax exemption certificate?
No. The IRS describes Form W-9 as the way to give your taxpayer identification number to someone who must file an information return. An exemption certificate claims exemption from sales tax on a purchase.
What is a US resale certificate?
In California's words, a resale certificate indicates that the purchaser, in good faith, would resell the item and report tax on the final sale. The supplier keeps it to document why it did not charge sales tax.
