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Spring 2007-10 When should you accept a sale tax exemption certificate?

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Number 67
Spring 2007


When should you accept a sale tax exemption certificate?


The Puerto Rico Treasury Department issued Informative Bulletin Number 06-12 to clarify doubts as to when merchants should accept sale tax "Exempt Purchase Certificates" from customers.


Certain buyers are entitled to acquire merchandise free of the sale tax. These are persons and entities registered with the Merchants' Registry of the Treasury Department. Treasury issues an "Exemption Certificate," a copy of which must be produced for the seller's or service provider's records.

Rules

A seller or supplier has to be prudent when accepting the certificates, and must exercise sufficient care to determine if in fact the buyer is exempt from tax in each particular purchase. Consider the following rules and keep in mind that merchandise has to be bought primarily for resale:

  • Determine if the buyer will resale at least 80% of the articles. An automobile dealer, for example, sells spare parts. Although car sales constitute its mayor source of income, it qualifies for tax-exempt purchase of spare parts if the dealer will resale at least 80% of the same.
  • Determine if the buyer will resale the articles without changing them or incorporating them to other articles or property. Building contractors and developers do not qualify for exemption in the purchase of construction materials, as they are bought to be incorporated into another type of property.
  • Verify that the articles are not to be used to provide a service. As another example, a mechanic is not entitled to exemption in the purchase of auto parts because he will use them mainly to provide a service, i.e., repairing a car.

Therefore, in order to exercise the required due diligence in accepting an Exempt Purchase Certificate from a buyer, a seller or supplier must be familiar with the buyer's business, make reference to the Exemption Certificate, a copy of which he must keep on file, and determine the likely use the buyer will give to the property.


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