Washington Rules That Acceptance of Exemption Certificate Relieved Seller of Sales Tax Liability

By: Camille Adams, SALT Senior Associate

At a glance:

• The main takeaway: A recent tax determination out of Washingtonexcused a rental company from its responsibility to collect and remit sales tax because it accepted a fully completed exemption certificate from the buyer.
• Impact on your business: Each state has different rules regarding the requirements for accepting exemption certificates, so it is important to practice caution and due diligence when assessing your tax collection obligations.
• Next steps: Aprio’s State and Local Tax (SALT) team can help your business develop a process and navigate the rules for supporting and documenting exemption certificates.

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The full story:

On July 31, 2023, the Washington Department of Revenue (Department) Administrative Review and Hearings Division (Division) published a tax determination addressing a rental company’s (referred to throughout this article as “Taxpayer”) protest of the Department’s disallowance of a retail sales tax exemption the Taxpayer claimed in relation to its rentals of audio equipment to artistic or cultural organizations.¹

A closer look at the case

The Taxpayer is a company located in Washington that rents audio equipment to customers for use in concerts, festivals, meetings and other events. The equipment includes speakers, cables and other items needed for sound amplification. The Taxpayer’s rentals can be categorized into two general groups. The first group is rentals of equipment only, where the customer is responsible for providing their own personnel to operate the equipment. The Department calls these “bare rentals.” The second group of rentals includes equipment that the employee sets up, removes and operates (typically referred to as “rentals of equipment with an operator”).

The Taxpayer’s customers also can be categorized into two general groups: artistic or cultural organizations (nonprofits)² and all other customers. When a nonprofit customer presented the Taxpayer with an exemption certificate, the Taxpayer accepted it, believing at the time that the customer was eligible for an exemption. Therefore, the Taxpayer did not collect sales tax on those transactions.

During an audit, the Department determined that nonprofit customers who rented equipment with an operator were not eligible for an exemption and assessed the Taxpayer for sales tax on those sales — and then, this protest ensued.

The first issue addressed was whether the rental of audio equipment with or without an operator is considered the rental of an object eligible for tax exemption when purchased by an artistic organization.

Washington imposes sales tax on all retail sales within the state including rentals and leases of tangible personal property.³ Notably, retail sales include rentals of equipment with an operator (the operator must do more than maintain, inspect or set up the property).⁴

However, the state provides an exemption from sales tax for sales of “objects” to artistic and cultural organizations, which includes transactions in which the object is “to be used in displaying art objects or presenting artistic or cultural exhibitions or performances.”

The Division concluded that bare rentals are rentals of objects for purposes of the exemption, but that rentals with operators are services, not objects, and are therefore ineligible for the exemption.

After finding that the operated rentals were taxable, the Division next examined whether the Taxpayer should be held liable for failing to collect the tax when they accepted exemption certificates on sales that should have been taxable.

Under Washington law:

Sellers are relieved from personal liability for the amount of tax if they obtain a fully completed exemption certificate or capture the relevant data elements required under the streamlined sales and use tax agreement within ninety days, or a longer period as may be provided by rule by the department, subsequent to the date of sale.⁵

The Division noted that this provision does not impose any good faith requirement on the seller when accepting an exemption certificate. Therefore, it concluded that the Taxpayer was excused from its responsibility to collect and remit sales tax because it accepted a fully completed exemption certificate from the buyer, regardless of whether the transaction was actually exempt.⁶

The bottom line

This decision is in stark contrast to Mississippi’s June 2023 case discussed in last month’s newsletter. In that case, the Mississippi Court of Appeals concluded that a taxpayer cannot blindly accept resale certificates but must ensure that the resale exemption applies at the time of each sale.

Each state has different rules regarding the requirements for accepting exemption certificates. Aprio’s SALT team understands the rules for supporting and documenting exemption certificates, and we can assist your business with developing a process for vetting your customers’ exemption claims, maintaining the appropriate exemption documentation, and renewing that documentation at the appropriate time.

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.

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¹ Washington Det. No. 21-0048, 42 WTD 025 (2023). The decision was issued in March 2021, but was not published until now.

² While we will refer to these organizations as “nonprofits,” note that the exemption discussed in this article applies specifically to “artistic and cultural organizations” and not necessarily all nonprofits.

³ RCW 82.04.050(4); see also WAC 458-20-211(6).

⁴ RCW 82.04.050(9)

⁶ RCW 82.08.050(7)(a). Was

⁶ It is worth noting that if the seller did not get a certificate within 90 days, it may still obtain one within 120 days after a request by the Department for substantiation of a claimed exemption. However, in that case, any exemption certificate obtained from the purchaser must be taken in good faith. RCW 82.08.050(7)(b).