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Sales Tax Exemption Documentation is your Get Out of Jail Free Card

Does your company ever make sales of taxable items without charging your customers sales tax?  Could you prove these sales are exempt during an audit?  If not, you may have a sales tax liability waiting to happen.

Companies make sales of taxable items without charging sales tax to their customers for several legitimate reasons.  For example, there may be a special tax incentive which applies to the sale or the customer may be purchasing the items for resale.   In Washington, there are various ways to document that a sale is exempt from sales tax.  However, in an audit, the burden of proving a sale is exempt is on the taxpayer.  Without documentation, the seller can be assessed the sales tax even if they did not collect it from the customer.  Washington sales tax rates are up to 9.5% so the liability can add up fast.  That’s why documenting and retaining the proper exemption forms are a business’ get out of jail free card when it comes to an audit.

In Washington, there are several different ways to document a wholesale sale.  For sales prior to 2010, the seller needs to maintain a completed copy of the purchaser’s Resale Certificate.  For sales in 2010 and beyond, the seller needs documentation that the customer had a valid Reseller Permit applicable to the purchase.  The simplest method is to maintain a copy of your customer’s Reseller Permit in your business files.  Alternatively, the Washington Department of Revenue maintains a business search tool on their website which can be used to verify a permit number and a Reseller Permit verification service for multiple customer look-ups.  If these are used, be sure to keep copies of either the business record or confirmation code as your documentation.  Information regarding these DOR tools is available through the link below.

Alternatively, two other forms are also acceptable for a resale purchase.  Either a Streamlined Sales Tax Exemption Certificate or a Multi-State Tax (MTC) Exemption Certificate may be used.  Both should be filled out completely by the buyer.

If the sale is exempt for another reason, be sure to get the applicable documentation from your purchaser. There is a general WA Buyer’s Retail Sales Tax Exemption Certificate which applies to many state tax incentives.  Special rules also apply to US Government purchases; be sure to review the additional information on the DOR website.

So what if you don’t have the necessary documentation for prior sales?  Try going back to your customers and requesting this documentation.   Alternatively, if the sale should not have been exempt, your customers may have paid use tax on these items.  If you can get a letter or email from your customers stating they paid use tax to Washington on the applicable invoice, this will protect you in the event of an audit as well.

Companies can go out of business, so documentation may not be available at a later date.  Therefore verifying that you have the proper documentation during the order process will protect your business in a future audit.

You can find more information on Washington resale documentation here.


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