Retailers may want to review record-keeping in light of new law for tax-exempt groups

While a new law deals only with tax-exempt groups, it could have record-keeping repercussions for retailers, innkeepers and other businesses that sell merchandise or rent rooms to the tax exempt, especially if the business doesn’t already have a process in place to keep track of sales, use and lodging tax exemption numbers and expiration dates.

>> Detailed explanation of the new law as it relates to retailers

In its August special session, the Alabama Legislature passed the law changing how and how often the state certifies groups that are sales, use or lodging tax exempt. The law for those groups becomes effective Jan. 1, 2016.

Code of Alabama listing of statutorily tax-exempt entities
(not an all-inclusive list)

Businesses should receive a notice from the Alabama Department of Revenue on or about Wednesday, Nov. 4, 2015, related to this law change. On its face, the notice makes it seem the new law requires retailers to follow a whole new set of rules related to tax-exempt sales. Not so.

By law, selling to exempt entities has been “at the seller’s risk” since 1982. That means if the seller cannot prove a sale was legitimately tax free, then the seller owes the tax. A seller with “a properly completed and duly signed certificate” of exemption, however, is protected from liability for the sales taxes.

To avoid having to pay taxes long after a sale, most retailers have implemented some internal process for keeping up with tax-exempt sales or record-keeping to prove during an audit that their tax-free sales were legitimate – not because it is the law or a Revenue Department rule, but because it is a best practice.

Proof of Exemption GraphicThe graphic at right and the Alabama Retail Association web page related to the law should clear up what document is acceptable as proof of a tax exemption in the eyes of the Alabama Department of Revenue.

Here are some other truths and myths about tax-free sales:

MYTH: Tax-exempt groups have to present a certificate of exemption (Form STE-1) each time they come through a check-out line or step up to the check-in counter at a place of lodging.

TRUTH: If challenged by state auditors, a business could still prove the sale was tax exempt by going to the buyer and obtaining the certificate after the fact. It just makes good business sense to put the certificate on file the first time a tax-exempt entity purchases merchandise or rents a room. Besides keeping the certificates on file, it is also a best practice to have a process in place for keeping up with the certificate number, expiration date and the tax-free purchases.

MYTH: All businesses have to change their processes for dealing with tax exemptions.

TRUTH: Not necessarily. Retailers, innkeepers and other businesses that already have programmed exemption numbers into their point-of-sale systems or otherwise have a process in place for handling tax-exempt entities that involves keeping certificates of exemption on file and flagging expiration dates can maintain those processes as is.

Suggested next steps for retailers:

  • Between now and Jan. 1, review your records on the Alabama tax-exempt organizations with which you regularly transact business to make sure that the proof of exemption the business has on file is a certificate of exemption and that the certificate has not expired.
  • If you aren’t flagging expiration dates in your process, you may want to start doing so. While the exemptions do not expire, the certificates are annual and have varying expiration dates.
  • Verify an exemption number and its expiration date through My Alabama Taxes, or MAT, on the home page, under “I want to …,” click “Verify Exemption Certificate.”

The current system used by wholesalers and manufacturers claiming tax-free status remains the same.

More on this subject from Alabama Retail

Tax-Exempt Sales, Use and Lodging Certification
Standardized as of Jan. 1, 2016