Substance of alert
The North Carolina Department of Revenue (“Department”) has amended its sales tax regulation regarding the use of resale exemption certificates. Under the amendment, the regulation imposes punitive measures on sellers—rather than purchasers—for the “misuse” of resale exemption certificates. Misuse occurs, according to the new rule, if the seller accepts a resale exemption certificate, does not charge tax, but the sale is actually a taxable sale (i.e. the Department determines that the sale is not an exempt wholesale sale).
The rule at issue is 17 NCAC 07B.0106. Previously, section (c) of that rule provided the following:
Persons who issue certificates of exemption to vendors to obtain property without payment of tax when due are subject to assessment of the penalties set out in G.S. 105-236(5) and (5a) and may be guilty of a Class H felony. The penalty for misuse of a certificate of exemption is applicable only to a purchaser.
As amended, that section provides the following:
The penalty for misuse of an exemption certificate applies to each seller identified by the Department from which the person made a taxable purchase…. Misuse occurs when a person makes a taxable purchase and . . . the seller does not charge sales tax on the basis that the sale is a "wholesale sale" as defined in G.S. 105-164.3.
This rule change conflicts with the statutory penalty imposed under N.C. Gen. Stat. § 105-236(a)(5a), as well as the “good faith” standard set forth in N.C. Gen. Stat. § 105-164.28(b)(1).
N.C. Gen. Stat. § 105-236(a)(5a) explicitly imposes a penalty on the misuse of an exemption certificate “by a purchaser.” The Department’s rule change seemingly flips that statutory provision on its head, at least in the context of resale exemption certificates. Importantly, the change also eliminates the specific cross-references to subsections (a)(5) and (5a) of section 105-236 and only generally references section 105-236, thus indicating that the Department may seek to broaden its authority to impose additional types of penalties for the misuse of a resale exemption certificate.
N.C. Gen. Stat. § 105-164.28(b)(1) relieves a seller from sales tax liability on an otherwise taxable sale if the seller obtained an exemption certificate from the purchaser in “good faith.” The “good faith” standard requires only that a seller determine that the certificate obtained is for an exemption that (a) is statutorily available on the date of the transaction, (b) could be applicable to the item being purchased, and (c) is reasonable for the purchaser’s type of business.
The Department’s rule change makes no distinction for sellers who accept resale exemption certificates in good faith. Rather, the new rule deems “misuse” to occur any time a seller makes a sale for which: (1) the seller receives a resale exemption certificate; (2) the seller does not charge sales tax because it initially determines the sale is a nontaxable “wholesale sale;” and (3) the Department later determines to be a taxable non-wholesale sale. Thus, under this new rule, a seller could be statutorily relieved from sales tax liability on a sale while simultaneously being subject to penalties for “misuse” of a resale exemption certificate on that same sale.
We do not believe the North Carolina legislature intended for a seller to be subject to penalties for the misuse of a resale exemption certificate, and certainly not a seller acting in good faith. That said, the Rules Review Commission approved the Department’s proposed change. Sellers operating in North Carolina and relying on resale exemption certificates should thus be mindful of the change—which is effective January 1, 2024—and the risk of penalties thereunder.
View a copy of the revised rule.
Client Alert 2023-282
