Strategy

Navigating the Rough Waters of State Sales Tax

Does an out-of-state vendor create a sales-tax exemption? And how solid are tax-exempt provisions in customer purchase orders?
CFO.com StaffFebruary 27, 2001


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Q: If we contract with a New York-based vendor to drop ship some parts to a customer of ours, also in New York, would the sale be exempt from New York sales tax? We are a distributor, and the above-mentioned parts are for resale. Therefore, we consider the parts exempt from sales tax in Massachusetts, where we are based, and in New York, where our customer is located.

We consider the vendor a seller of the product to us, but also as an agent in transporting the goods (like any other shipping outfit) to the final destination.

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We have received mix reviews on how to handle the transaction. Some vendors would withhold New York state sales tax and others would look at the transaction as being exempt.

A: A New York state vendor can accept a New York State Resale Certificate Form 120 from an out-of-state business to cover this type of transaction, filling out Page 1 with emphasis on Part 2, paragraph C. –Stewart Buxbaum, managing partner, S. Buxbaum & Co. PC. Buxbaum is Chairman of the New York State Society of CPAs’ State and Local Tax Committee. He previously served as group chief in the sales tax division of the New York State Department of Taxation and Finance.

Note: Acopy of the NY State Resale Certificate ST-120 and instructions are available at http://www.nysalestax.com

Q. Can I rely on tax-exempt provisions in customer purchase orders to defend my company in an eventual sales tax audit, or must I continue to use the “old fashioned” method of demanding tax exemption certificates from customers?

A. All states have either statutes or regulations that set the requirements for substantiating exempt sales, and they all require some type of certificate (blanket or unit) on file in order to make an exempt sale. Therefore, you should not simply rely on the tax-exempt provisions contained within a customer invoice.

–Chip McClure, Director of Sales & Use Taxes Sears, Roebuck & Co.

Michael S. Burke of KPMG LLP also advises obtaining a certificate, which frees the company from the burden of proof in the event of an audit:

Like most answers covering sales and use taxes, there is no single uniform answer to your question among the states. The states are behind the curve in providing guidance in many areas of e-tax compliance, including the area of exemption certificates. By obtaining an exemption certificate, the burden of proving that the sale was not exempt is on the state. Without an exemption certificate, the company will have the burden of proving on audit that the sale was exempt. Although states have become more relaxed in accepting other proof of exemption, and the customer purchase order may be acceptable proof on audit, the “old fashioned” way is still the rule in a number of states.

–Michael S. Burke, National Partner in Charge, E-Tax Solutions KPMG LLP

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