Proper use of FET exemption certificates

From an NTEA member From time-to-time, we make both sales for resale and sales to state and local governments. We understand that these sales may be nontaxable if you have an exemption certificate. Where can I find the form certificate? There is no one form certificate that can be used for both types of tax-free sales. A tax-free sale for resale has one form certificate, and a tax-free sale to state and local governments has an entirely different form certificate. Following is a brief discussion of the certificate forms for each type of sale. However, it’s important to note that tax-free sales for resale and tax-free sales to state and local governments must satisfy other requirements, in addition to the proper form certificate. A. Sale for Resale The Internal Revenue Service (IRS) has published a form exemption certificate for a sale for resale at Treasury Regulations Section 145.4052-1(a)(6). However, this form certificate, which may be used only for tax-free sales for resale, is outdated and must be modified in order to comply with the requirements for a tax-free sale for resale. Most importantly, this form certificate needs to be modified so that it is signed under penalties of perjury. Therefore, before you rely on the form resale certificate in the Treasury Regulations, you need to add the words “under penalties of perjury” in the first line of the IRS's form certificate after the word “certify”. (The other modification is a deletion rather than an addition_ a purchaser is no longer required to be registered or to provide its registration number for a tax-free sale for resale. Therefore, the language in the form certificate relating to Form 637 and the purchaser’s registration number may be deleted.) For information about other requirements for a tax-free sale for resale, see Treasury Regulations Section 48.4052-1. B. Sale to a State or Local Government The IRS has published a form exemption certificate for a sale to state and local governments at Treasury Regulations Section 48.4221-5(c). (As an alternative to a separate certificate, a purchase order may be used, so long as all the information contained in the form certificate is included in the purchase order.) This form certificate may be used only for tax-free sales to state or local governments. For information about other requirements for a tax-free sale to state or local governments, see Treasury Regulations Sections 48.4221-1 and 48.4221-5. C. Timing Tips for Both Types of Certificates Both form certificates may be used to cover all sales to a particular purchaser for a period of 12 calendar quarters (effectively, a three-year period). Although this option provides a potential convenience for frequent customers, it also creates the risk that the seller will forget to have the purchaser sign a new certificate when the three-year period expires. The IRS strictly enforces certificate requirements, so if a seller is relying on an expired certificate, the IRS likely will treat the sale as taxable. Therefore, if possible, obtain a separate exemption certificate from the purchaser for each sale. If that cannot be done, then add the expiration date to the certificate (i.e., the date that is three years after the initial certificate date) so that you will be more likely to know when the certificate expires. In addition, it is critical that you obtain the form certificates at or before the time the sale occurs. For example, the IRS generally will not permit sellers, in an audit, to go back to the purchaser to obtain an exemption certificate for a past sale. Each type of tax-free sale has its own unique set of requirements. Before selling an article tax-free that generally would be taxable under Internal Revenue Code Section 4051, the seller should consult with its tax advisor to confirm that the sale meets all the requirements for tax-free treatment.

Proper use of FET exemption certificates

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