Tax & Accounting Blog

Exemption Certificates Play Key Role in Criminal Case

Blog, Indirect Tax, ONESOURCE, Sales and Use Tax April 20, 2016

It’s safe to say that exemption certificates, which play an important role in sales tax collection around the country, aren’t generally considered an exciting topic of conversation. The certificates allow wholesale purchasers to buy goods tax-free with the idea that those goods will be sold to retailers, who will then collect sales tax from their customers. You’ll be forgiven if you nodded off during that last sentence.

However, exemption certificates recently played a key role in a major criminal case, the details of which could have been lifted from an episode of The Sopranos. According to an article in The Roanoke Times, “Two New Jersey residents face charges of using shell businesses and accomplices to purchase $9.5 million worth of Virginia cigarettes and transport them to New Jersey for illegal resale in a major cigarette trafficking operation.”

Virginia, which has the second-lowest cigarette excise tax in the country, is a center for cigarette-smuggling operations, in which cigarettes are purchased in low-tax states, then illegally resold (tax-free, of course) in high-tax states.

In this particular case, the suspects have been charged with “conspiracy to traffic contraband cigarettes, trafficking contraband cigarettes and structuring the cash transactions to avoid triggering the federal reporting forms.” Although they might still have made money even if they had actually paid the lower Virginia taxes, the suspects had an ace up their sleeve that they used to maximize their profits: “All of the [shell] businesses, however, had obtained certificates exempting them from paying sales tax when buying the cigarettes in Virginia because they were supposed to be reselling the cigarettes wholesale to legitimate retailers who would collect the sales tax.” (emphasis added)

Exemption certificates: out of the realm of tax wonks and into the world of organized crime.