The complexities of fuel exemption certificates

How often does your fuel company handle sales tax exemption certificates? If the answer is “occasionally” or “rarely,” it might be time to reevaluate how the organization is approaching tax-exempt transactions.

Sales tax exemptions are common in the fuel industry, which means auditors are likely to be on the lookout for exemption certificates in the event of an audit. This valuable compliance documentation is the proof you need to support non-taxed transactions; exempting fuel sales even in the absence of valid exemption certificates is risky business that can lead to steep penalties.

The fix should be simple—and on the surface, it is: exempt a sale, capture a valid exemption certificate. In practice, however, fuel companies face an array of complications. For example, did you know that:

• In New York, a new exemption certificate is required for each individual purchase of non-highway diesel motor fuel for diplomatic purposes?

• In Wisconsin, fuel that’s resold for consumption in certain manufacturing applications must be separated out as a percentage of the resale?

• In South Carolina, fuel that’s used aboard ships involved with intercoastal trade or foreign commerce will require an exemption certificate?

• If fuel is being used to heat a small business facility in Massachusetts, the transaction cannot be exempted from sales tax without the presence of a specialized exemption certificate?

This is just the beginning of a very long list of complicated exemption certificate requirements throughout America. Every taxing jurisdiction in the U.S. takes its own approach to sales tax exemptions, and these can vary widely from state to state. In the event of an audit, unfortunately, it is your responsibility to ensure the correct certificates not only have been supplied, but also correctly and thoroughly completed. Simply collecting a certificate isn’t enough. You also have to review it for completeness and accuracy.

If you’re uncertain as to where your fuel company currently stands on exemption certificate management, here are three key questions to ask:

When is your staff collecting exemption certificates?

With few exceptions, an exemption certificate should be requested at the time of sale. Or, if the transaction involves a recurring customer or long-standing partner, staff should quickly verify the customer’s status to ensure an up-to-date certificate is on file.

Exempting a transaction without proof—this is often done when the purchasing party promises to send a certificate at later date—increases the risk that the exempted individual will fail to follow through. And if you don’t have a valid certificate on file for every transaction in which an exemption was claimed, you run the risk of becoming liable for those taxes in the event of an audit.

How are your exemption certificates being validated and stored?

If hard copies and scanned versions are haphazardly filed in cabinets and recorded in spreadsheets, you could be in for a week’s worth of work when it comes time to extract a small sampling for an auditor. There’s no way to know which certificates will be requested under audit, so having all of them stored in a way that’s accessible and easy is highly important.

In addition, using a systematic process to validate and catalogue exemption certificates makes it easy to identify when you need to follow up on a certificate that’s missing information or has been incorrectly filled out.

How often are exemption certificates updated?

How many certificates are expiring this month? Next month? Next quarter? How long a customer’s certificate remains valid will depend on your jurisdiction. In many states, they need to be renewed every five years. In others, it’s three. And there are some states where certain certificates never expire. To avoid confusion in the event of an audit, you’ll need to track all those dates and have a plan in place for following up with your customers to stay ahead of the game.

In conclusion:

Of all the industries that deal with sales tax exemptions, fuel companies face some of most complicated exemption certificate demands. But while many states have complex compliance requirements, few do a good job of explaining what you should do to remain compliant. It is up to you to become familiar with the demands in every state where you do business.

If you’d like to learn more about what it takes to properly manage exemption certificates and reduce audit liabilities, these related posts also offer more detailed insights and recommendations:

Tips from a Former Sales Tax Auditor

When Do You Need to Obtain a Sales Tax Exemption Certificate?

How to Prepare for a Sales Tax Exemption Certificate Audit in 9 Steps