In a prior client alert issued December 18, 2023, we reported that the North Carolina Department of Revenue (“Department”) amended its sales tax regulation regarding the use of resale exemption certificates (17 NCAC 07B.0106). The revised regulation states that “[t]he penalty for misuse of an exemption certificate applies to each seller identified by the Department from which the person made a taxable purchase….” Given that the prior version of the regulation stated that “[t]he penalty for misuse of a certificate of exemption is applicable only to a purchaser,” we noted the change in the language about the party to which the penalty “applies” and we reported in our prior client alert that the revised regulation suggests that penalties for the misuse of resale exemption certificates would apply to sellers.
The Department subsequently published an Important Notice (dated January 1, 2024) titled “Sales and Use Tax Bulletins Updated & Additional Information about the Penalty for Misuse of an Exemption Certificate” clarifying its interpretation of the revised exemption certificate regulation. In that Notice, the Department clarified that the “penalty for misuse of an exemption certificate is imposed on a purchaser for each seller identified by the Department from which the person made a taxable purchase” and the penalty “applies to the person issuing the certificate, not a seller who accepts the certificate.” The Department made similar clarifying comments when it published its annual Sales and Use Tax Bulletins for 2024.
For the sake of completeness, we have included below verbatim the relevant portion of the Notice, and a complete copy of the Notice can be found on the Department’s website.
Misuse of an Exemption Certificate
N.C. Gen. Stat. § 105-236(5a) imposes a two-hundred and fifty-dollar ($250.00) penalty for misuse of an exemption certificate. This penalty is imposed on the person issuing the exemption certificate. North Carolina does not impose a penalty on a seller that accepts a completed exemption certificate in compliance with N.C. Gen. Stat. § 105-164.28.
The Department recently amended an administrative rule to clarify the frequency at which the penalty applies to the person issuing the certificate. The penalty for misuse of an exemption certificate is imposed on a purchaser for each seller identified by the Department from which the person made a taxable purchase.
A third-party alert incorrectly stated the rule change imposes penalty on sellers accepting exemption certificates from purchasers. The Department does not interpret the rule or statute to impose the misuse of an exemption certificate penalty on a seller for accepting an exemption certificate. As stated above, North Carolina does not impose a penalty on a seller that accepts a completed exemption certificate in compliance with N.C. Gen. Stat. § 105-164.28.
In order to eliminate any confusion, the Division added language in SUTB 5-1A. to make clear that the penalty for misuse of an exemption certificate is imposed on the person issuing the exemption certificate. The section now provides: “The penalty for misuse of an exemption certificate applies to the person issuing the certificate, not a seller who accepts the certificate.”
We applaud the Department of Revenue for acknowledging the confusion with the language in the new regulation and for acting swiftly to publish clarifying guidance.
Client Alert 2024-002
