Understanding Tax Exemptions and Taxables
Top audit issues for sellers
1. Exemption Certificates.
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States place a burden of recordkeeping and of care on a seller to only accept properly completed exemption certificates.
If the seller mistakenly accepts a certificate or does not have the certificate on hand when an audit is undertaken then,
unless the seller is able to obtain the properly completed certificate, the seller is liable for the tax that should have been
collected on the sale.
This can be an expensive proposition when "exempt sales" create an error rate that is extrapolated across the entire sales
population.
2. Misclassifying a product or service.
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E.g. If a state exempts food but taxes candy, and the state believes that the retailer sold candy because it had erroneously
classified the product as food, this also creates major problems.
― As states continue to evaluate taxation of digital and technology products, sellers of these types of products have a major
risk.
3. Sourcing a sale to the wrong jurisdiction or collecting tax at the wrong rate.
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E.g. If the sales data for customer's address is not sufficiently defined, then the seller may collect tax at the wrong rate or
remit tax to the wrong jurisdiction.
4. Discovery by taxing authorities based on data matching that shows seller activities in a jurisdiction where the seller is not
registered.
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