Beginning Jan. 1, 2016, the only valid proof of a sales, use or lodging tax exemption for statutorily tax-exempt organizations will be a certificate of exemption, known as Form STE-1. With the exception of governmental entities, presenting letters from the Revenue Department or copies of the state statute granting an exemption will no longer be acceptable under state law.
>> Code of Alabama listing of statutorily tax-exempt groups (not an all-inclusive list)
“The new law standardizes the process by making one uniform document” as the only valid proof of a non-government exemption, said Rouen Reynolds, director of the Alabama Department of Revenue’s Sales & Use Tax Division. “It should make it easier for retailers” to verify exempt organizations, she said. The Alabama Legislature made this change during its August 2015 special session. The state notified sellers of the new law Nov. 4, 2015, via “My Alabama Taxes,” the Revenue Department’s online tax management portal.
WHAT THIS LAW MEANS FOR RETAILERS
Retailers, innkeepers and other businesses that already have programmed exemption numbers into their point-of-sale systems can maintain those processes as is, IF the process for handling tax-exempt entities involves keeping certificates of exemption on file and flagging expiration dates. For those without a process, now may be a good time to implement one.
As a best practice between now and Jan. 1, retailers and innkeepers should review their records on the Alabama tax-exempt organizations with which they 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. As of Jan. 1, sellers should accept only an exemption certificate as proof of exemption from any non-government organization that claims tax-free status.
SELLING TAX-FREE IS ‘AT SELLER’S RISK’
Without a certificate of exemption on file, sales should be taxed. Under current law, sales to exempt entities are “at the seller’s risk,” and it is best practice to have the certificate on file so the seller can meet its burden of proof in case of an audit.
FLAG EXEMPTION NUMBER AND EXPIRATION DATE
All certificates of exemption have a number and expiration date associated with them. The numbers and the expiration date on current certificates on file remain the same, as long as the certificate was issued for a single year. Multiple-year certificates will no longer be valid as of Jan. 1, and the department is reissuing those multi-year certificates to comply with the one-year expiration date required, said Reynolds. Sellers should take note that certificate renewal dates come up all through the year, rather than at a uniform time. Flagging expiration dates in your process should be considered.
Retailers can 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.”
WATCH FOR TAX-EXEMPT GROUPS PRESENTING CERTIFICATES FOR FIRST TIME
The only new certificates of exemption being issued as a result of this law are to entities that previously used some proof other than a certificate and those with multi-year certificates, according to the Revenue Department. Still, the number of entities presenting a new certificate to sellers as proof of tax-free status could be large. In Alabama, 462 exemptions currently are granted by state statute: 228 for sales taxes, 178 for use taxes and 56 for lodging taxes. A single exemption can apply to multiple organizations, such as all of the organizations funded by a United Way agency.
EXCEPTIONS AND LOOK OF CERTIFICATES
Governmental entities, health authorities and certain public utilities can continue to present letters to sellers as proof of exemption (see the notice linked below for a full list). The current system used by wholesalers and manufacturers claiming tax-free status also remains the same. The exemption certificates for statutorily exempt organizations look the same as those for wholesalers and manufacturers. Each certificate should contain the exemption number (EXM-number), an expiration date, the name of the person or company to whom the certificate is issued, the reason for the exemption, any restrictions and the signature of a Revenue Department employee.
Full Revenue Department notice related to the law governing statutory sales, use and lodging tax exemptions
>> Proposed DOR rule for the tax-exempt entities (Hearing scheduled for 10:30 a.m. Nov. 12, 2015)