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What is the difference between a Resale Certificate and Tax Exempt Certificate? (We are establishing a procedure for tax exemption certificate management.)

Full Question: We are establishing a procedure for tax exemption certificate management. What is the difference between a Resale Certificate and Tax Exempt Certificate? If a customer presents a resale certificate from their state does that qualify as an official tax exemption certificate? Your website provides an overview of each state and the resale certificate periods for each state. Are those periods the same expiration periods for a exemption certificate?

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Answer:

Diane Yetter photoThe difference between a resale certificate and tax exempt certificate is the reason for the exemption. Companies that qualify for a resale certificate are eligible to purchase items that they buy either as ingredient or component parts of what they are selling or items that they resell in their purchased condition. For example, a department store can issue a resale certificate to a clothing manufacturer for sweaters that they purchase and plan to resell. A manufacturer of bread can purchase flour for resale as they are incorporating flour into the bread that they will resell to a store to sell. A resale certificate can not be used to purchase other types of items exempt from sales tax that don't qualify for this purpose. An exemption certificate is issued either because the entity qualifies for an exemption or the use of the item qualifies for an exemption. For example, in many states, hospitals are considered exempt organizations. If an exemption exists for these types of organizations in a given state, they are issued an exemption status and will need to issue an exemption certificate to their suppliers to exempt the sales tax. Another type of exemption certificate could be a manufacturing exemption certificate. In some states, machinery and equipment used in the manufacturing process is exempt from tax. In this case, the manufacturer would issue an exemption certificate to their suppliers when they purchase qualifying items claiming the manufacturing exemption. For exemption certificates, forms, rules and procedures vary by state and within a state by the type of exemption. It is very important to review and evaluate the rules that apply for the type of exemption being claimed to be sure the appropriate documentation is used. In terms of expiration dates they can vary between the type of certificate. It is more common for expiration dates on exempt organization exemption certificates but between all the states, there are many different rules. We can assist you with evaluating your needs and help you set up a process if you are interested. There are tools that are available to assist with this type of process.

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