Ohio Sales Tax Audits: No exemption certificates? Ohio vendors have several additional avenues for demonstrating that its sales were not subject to tax
As part of a routine audit of a vendor’s sales, the Ohio Department of Taxation (“DOT”) will ask the vendor to produce exemption certificates to support any sales for which no tax had been collected. Generally, vendors should collect exemption certificates from their customers at the time of the sale or with 90 days thereafter. Accepting a fully completed exemption certificate alleviates the vendor’s obligation to collect sales tax, provided the certificate is not accepted fraudulently. If a valid certificate is not accepted at this time, the vendor will be given an opportunity to obtain exemption certificates during the course of the audit. R.C. 5739.03(B).
If an exemption certificate is not obtained, the Ohio vendor can obtain “letters of usage” from its customers which require even more detail as to the consumer’s exempt use of the property or service. However, oftentimes the customer may not exist or be cooperative at this time since the audit occurs years after the sale was made. Then, what do you do?
In the absence of exemption certificates and letters of usage, the vendor may still establish that its sales are nontaxable for any of the following reasons:
- The sale is never taxable, such as sales of food for off-premises consumption;
- The sale occurred outside of Ohio such that Ohio does not even have jurisdiction to tax the sale;
- The customer is clearly exempt; for example, the sale was made to a government entity or a non-profit / I.R.C. § 501(c)(3) organization;
- The customer has a direct pay permit which means vendors need not collect tax on any sales thereto; or
- The customer paid the tax to the Department of Taxation, either voluntarily through a use tax payment or in the course of its own audit.
During the audit, it is well worth the effort to check these other avenues for establishing that your sales are not subject to Ohio sales tax. These can often substantially reduce the proposed assessment. Finally, vendors should keep in mind that they still have recourse against customers that did not pay the tax. The vendor can collect tax from the customer after it has been assessed, unless it contractually agreed to assume such liability.