Notable Cases

November 15, 2018

Proper classification of purchases in POS systems

We identified a business that was incorrectly exempting all purchases made by a customer who had previous purchases involving an exemption certificate.

The incorrect exempting of all purchases occurred because of the way the POS system was set up. The POS system identified exempted sales based on who the customer was, rather than considering if the purchase itself was exempt. This customer-based classification in the POS system caused 100% of all purchases made by certain customers to be exempted from tax. The audit found that while many purchased items were properly exempted from tax, there were purchased items that should not have been exempted. At the conclusion of the audit the entity was billed for sales tax that was not collected at the time of purchase.

Sales that qualify for no sales tax to be collected by the seller need an exemption certificate, which exemption is either entity-based or use based. 

Entity-based exemptions: An example of an entity-based exemption would include 501c3s, Vermont towns and schools, etc.  These entities may purchase all items exempt from Sales Tax. 

Use-based exemptions: Example of use-based exemption would include retailers, contractors, and farmers.  While a retailer purchases items for resale using a resale exemption certificate, or a contractor may purchase items exempt for an exempt real estate construction job using a contractor’s exemption certificate, or a farmer may purchase items used in the production of agricultural commodities using the agricultural exemption certificate, purchases like these, made with exemption certificates, are use-based purchases and would not be subject to sales tax. However, these customers would pay sales tax on other items that they themselves use or items that do not qualify for the claimed exemption. 

When accepting exemption certificates, it is important to set up your POS system to be able to distinguish between a taxable sale and an exempted sale made by the same customer.   

The Department has many resources to help you understand exemptions and exemption certificates


July 1, 2018

Multiple Home Businesses

We matched information and data to try to identify taxpayers who were misreporting expenses on Schedule C. In one case, we found that not only were deductions for one business being overstated, but that the individual was conducting multiple other lines of business but not reporting any of that activity on tax returns. Audit staff identified almost $50,000 of unpaid sales, use, and income tax across several years.

 

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