Wednesday, January 04, 2006

Direct Pay Certificates

First of all, what is a "Direct Pay Certificate?" In most states, larger organizations find them helpful because these types of companies buy lots of different things, some exempt and some taxable. This is particularly true for manufacturers, contractors and utilities. It's easier for them to get a direct pay certificate from the state. This allows them to buy pretty much everything without the vendor having to charge sales tax. The direct pay permit holder then self-assesses the use tax. Now you may think this is a pretty good idea. But there are catches:

1. States don't like to hand DP certificates out like Skittles. Don't think of this as a way of avoiding/evading tax or getting to hold onto the tax money a little longer. Generally states only give these out to larger companies with a need.

2. You can pretty much count on getting audited every three years. Because the state is now relying on your company 100% to self-assess (and we know how reliable most of us are at doing that), the state is going to be much more likely to audit you. Regularly. Frequently. Set up an office just for the auditors, if you know what I mean.

3. Tied in with number 2, you're likely to get audited before they even give you the permit, just to see if you have the systems in place to self-assess properly.

4. Finally, beware of mixing up which vendors you pay sales tax and which ones you don't (by giving them the DP certicate). I've talked with taxpayers who were not consistent in using their DP certificate. This resulted in paying sales tax on purchases and then turning around and self-assessing tax on the same purchase. At lease keep very close track of who you give a DP certicate to and who you don't.

Sales Tax Guy