Mississippi Retailer Lacked Good Faith in Accepting its Customer’s Sales Tax Exemption Claim

August 30, 2023

By: Jeff Glickman, SALT Partner

At a glance

  • The main takeaway: In some states, a business can be liable for sales tax on a transaction where they blindly accepted the customer’s documentation claiming an exemption from sales tax.   
  • Assess the impact: While Mississippi is unique in that it does not have a formal resale certificate form, each state will differ on what level of “good faith” due diligence is required when accepting a resale certificate.
  • Take the next step: Aprio’s State and Local Tax (SALT) team can help your business develop a process for vetting customer resale claims and maintaining appropriate documentation to minimize your risk of becoming liable for sales tax on exempt transactions. 

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The full story:

On June 6, 2023, the Mississippi Court of Appeals issued a decision against the taxpayer, Toolpushers Supply Co. (Toolpushers or the Taxpayer), finding that the Taxpayer did not act in good faith in accepting its customers claim that its purchases were exempt as wholesale sales (i.e., sales for resale).1

A closer look at the case

The Taxpayer is a Wyoming corporation with a retail location in Mississippi, and it sells “various items of property to purchasers in the oil and gas industry” including “casing, tubing, drill pipe, pumping units, valves and wellheads, sucker rods, tanks, fiberglass and poly pipe, as well as other parts and miscellaneous items related to energy exploration and production.”

After an audit, Toolpushers was assessed for about $125,000 for failure to collect and remit sales tax on certain sales which were made to oil field service providers that would be consumables or for the purchasers’ own use. The Taxpayer disagreed with the assessment, claiming that those sales constituted exempt wholesale sales (otherwise referred to as sales for resale) because the purchaser provided its Mississippi sales tax permit to document the exemption.

In Mississippi sales tax is imposed at a rate of 7% on the “gross proceeds of the retail sales of the business.”2 A “retail sale” is defined as and includes any sale “of tangible personal property except those defined herein as wholesale and those made to a wholesaler, jobber, manufacturer or custom processor for resale or for further processing.”3

A “wholesale sale” is defined as a “sale of tangible personal property . . . for resale in the regular line of business, when made in good faith to a retailer regularly selling or renting that property and when the dealer is licensed [for sales tax] in this state.”4

Unlike in most states where a purchaser would provide a seller with a resale certificate as support for the exemption, Mississippi does not have a formal resale certificate. Instead, sellers maintain copies of each purchaser’s Mississippi sales tax license. That is what Toolpushers did in this case; it accepted the license as evidence of the purchaser’s resale exemption claim and entered that permit into its point-of-sale system. Thereafter, any purchase by that customer would be invoiced without sales tax. No further inquiry was made by the Taxpayer.

The ruling explained

Based on this, the Court denied Toolpushers’ claim that these sales qualified as exempt sales for resale, explaining that under the definition of “wholesale sales,” two requirements must be satisfied. First, the purchaser must maintain a Mississippi sales tax license. The parties did not dispute that all purchasers had the proper license.

Second, the sale must be “made in good faith to a retailer regularly selling or renting that property.” In this case, the Court determined that Toolpushers did not satisfy this “good faith” requirement to inquire as to the purpose for which its customers were purchasing certain items. Merely having a sales tax license does not mean that the retailer can purchase everything under a resale exemption, rather it only applies to those items actually purchased for resale. As the Court stated:

For example, purchases of office furniture, cash registers, cleaning equipment, and material used to clean the business itself are not exempt. The possession of the permit itself does not mean that the business is excused from paying retail sales tax. It is the purpose for which each item is purchased that provides the exception.

Toolpushers argued that it was only required to have a good faith belief that the purchases are being made by a retailer that intends to resell them in the regular course of business. The Court disagreed, concluding that a seller is responsible for making the determination that the resale exemption applies at the time of each sale, and this determination goes beyond just accepting the purchaser’s sales tax permit.

While Mississippi is a bit unique in that it does not have a formal resale certificate form, even in the states that do, some impose upon the seller a “good faith” requirement in accepting that certificate, meaning that the seller cannot just blindly take a resale certificate provided by the customer. 

The bottom line

Each state will differ on what level of due diligence may be required, but at the very least, a seller should think about the customer’s business in relation to what it is purchasing. Aprio’s SALT team understands the rules for supporting and documenting resale exemptions, and we can assist your business with developing a process for vetting your customers’ resale claims, maintaining the appropriate exemption documentation and renewing that documentation at the appropriate time. These measures will minimize the risk that your business becomes liable for sales tax on transactions that your customers claim are exempt as sales for resale. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter

1 Toolpushers Supply Co. v. Mississippi Dep’t. of Rev., No. 2021-SA-01186-COA (June 6, 2023).

2 Miss. Code Ann. § 27-65-17.

3 Miss. Code Ann. § 27-65-7.

4 Miss. Code Ann. § 27-65-5.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.