Have a Sales or Use Tax Issue? You May Want to Consider Requesting a Written Ruling From the State

Did you know that when you call a state’s Department of Revenue and receive verbal guidance on a sales or use tax issue, and the guidance you received later turns out to be incorrect, you or your business could be held liable for any assessed tax, penalty or interest that may result from following the guidance you received? One way around this is to write a formal letter to a state’s Department of Revenue detailing your question(s) and asking the Department provide a written “ruling” on the taxability of the issue. Many individuals and businesses are not aware that they may request written guidance on a particular sales or use tax issue, that in turn, may help protect the business from a potential audit assessment. A formal request for tax guidance is generally referred to as a ruling request or private ruling letter. For sales and use tax purposes, a ruling request will generally relate to the taxability of a product, individual or pending business purchase and the circumstances that surround the transaction.

For example, a business selling tools in a rural area may have customers who wish to claim exemption from sales tax on their purchase of wire cutters and other tools. The customers have stated that the tools will be used in agricultural production and that the purchase of the tools should be exempt from tax under the state’s legislatively enacted sales tax exemption for agricultural producers. However, because the business owner is not sure if the tools qualify for tax exemption or not, and rather than just call the state for verbal advise that may not be relied upon in a sales tax audit, the store owner decides to write a letter to the state’s Department of Revenue requesting the Department “rule” on the taxability of the wire cutters and other tools sold for use in agricultural production.

Having a formal “ruling” from the state will not only help protect the business in an audit, it may also be used to demonstrate to the business’s customer that the state’s Department of Revenue has already determined whether the tools are taxable or not when sold to agricultural producers. If the tools were sold exempt from tax without first having determined whether the sale qualifies for exemption or not, the business could be held liable for any and all tax due on those sales plus assessed penalties and interest.

While this is only one small example of how a ruling request may help solve a sales tax issue, it does demonstrate how a written “ruling” from a state Department of Revenue can benefit both the business and its customers. It is important to note that a Department of Revenue ruling only applies to the entity and circumstances included in the ruling request.
States handle ruling request differently, so be sure to check to see what the procedures are for requesting a written ruling. In addition, almost all ruling letters are made public and can be found on a state’s Department of Revenue web site. It may be a good idea to look over a few of the published rulings to determine how best to craft your letter.

In addition, if it were determined that the tools qualified for exemption from sales tax, a state certificate of exemption for agricultural producers may need to be completed by the customer and kept on file at the store for audit purposes. You can find additional information on the sales and use tax by reading “A Guide to Sales and Use Tax”.

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