Will Colorado accept an electronically captured exemption/resale certificate with an electronic signature as adequate audit documentation, and what due diligence must the cashier still do?

Plain-English summary

A retailer with 900+ stores nationwide built a new electronic system to document tax-free sales at the register. The cashier keys in the buyer's information (organization name/address, registration/permit/tax-exempt number, contact, driver's-license number, phone), the customer verifies it on a PIN pad and signs electronically, and the system stores the e-signature. As described, the cashier doesn't ask to see, review, or copy the actual exemption certificate or sales-tax license. The retailer asked whether this electronic record (with e-signature) is adequate documentation on audit.

The Department's answer: the system is acceptable — a good step toward automating the exemption process — but with several reservations the retailer must build in:

1. Actually view the document. The cashier should examine the original or a copy of the exemption certificate or the wholesaler's/retailer's sales-tax license. The info is public, so viewing it is one check that the person presenting it is the proper owner.
2. Check the license isn't expired. A retailer's/wholesaler's sales-tax license shows an expiration date; a tax-free resale sale must be denied if the license is expired. (Exemption certificates have no expiration date.)
3. Use reasonable judgment on resale sales. The cashier must judge whether the product is one the buyer would plausibly resell — e.g., don't approve a child's toy as a resale purchase for a buyer whose license says office supplies or auto parts; and a few items (rather than a bulk purchase) casts doubt on a wholesale claim. When there's reasonable doubt, Colorado law requires you to assess the tax and tell the buyer to file a refund claim with the Department. You must also record a specific description of the product ("toy" is not enough) or you fail your burden of proving the sale was exempt (§ 39-26-703(4)).
4. Affidavit and payment rules for exemption-certificate buyers. When a customer presents an exemption certificate, the purchaser must complete an affidavit; and for purchases over $100, payment must be by the organization's check or credit card — not cash or the individual's card/check (those are allowed only under $100).

Out-of-state certificates: Colorado accepts exemption certificates and sales-tax licenses issued by other states for making a sale tax-free (see FYI Sales 1 and 3 for the affidavit example).

Verification tools: the Department's Sales Tax Information System lets a retailer verify instantly whether a certificate or license is valid, and returns the licensee's NAICS code to help with due diligence (also available by phone).

What this means for you

Multi-location and POS retailers automating exemptions

You can capture exemption/resale certificates and e-signatures electronically and rely on that record at audit — Colorado blessed the approach. But automation doesn't remove the cashier's duties: see the actual certificate/license, check expiry, vet that the goods fit a real resale, and record a specific product description. Bake these checks into the workflow, not just the data capture.

The resale due-diligence judgment

A resale exemption isn't a rubber stamp. If the goods don't match the buyer's line of business, or the quantity looks like personal use rather than wholesale, you have reasonable doubt — and the rule is collect the tax and send the buyer to claim a refund. That protects you on audit and protects the system from abuse.

Burden of proof is on you

Under § 39-26-703(4), you must prove an exempt sale. A vague record ("toy," "supplies") won't carry that burden. Capture what was sold in enough detail that the Department can later identify the product.

Common questions

Q: Does Colorado accept electronic exemption certificates and e-signatures?
A: Yes. An electronically captured certificate/license with an electronic signature is acceptable audit documentation — provided the cashier still views the actual document, checks license expiration, exercises resale due diligence, and records a specific product description.

Q: What do I do if I'm not sure a resale claim is legitimate?
A: If there's reasonable doubt (the goods don't fit the buyer's business, or it's a small non-bulk purchase), collect the tax and instruct the buyer to file a refund claim with the Department.

Q: Are there payment rules for exemption-certificate purchases?
A: Yes. The buyer completes an affidavit, and for purchases over $100 payment must be by the organization's check or credit card — not cash or the individual's payment method.

Q: Does Colorado take out-of-state certificates?
A: Yes — Colorado accepts exemption certificates and sales-tax licenses issued by other states for tax-free sales.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance, not binding on the Department.

Citations and references

Statutes and publications:
- § 39-26-703(4), C.R.S. — taxpayer claiming an exemption bears the burden of proof
- FYI Sales 1 and FYI Sales 3 — exemption/resale documentation and the affidavit example
- Department Sales Tax Information System — online license/certificate verification (returns NAICS code)

Related Colorado resale / documentation letters:
- [[gil-07-006-gift-card-stock]] — when a purchase does and doesn't qualify as a sale for resale
- [[gil-07-021-refunds-for-completed-sales-transactions]] — the collect-then-refund mechanism and burden of proof
- [[gil-08-003-wholesale-sales]] — wholesale/sale-for-resale framework

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-07-028.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-2007-28

XXXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
December 4, 2007
Re: exemption certificates
Dear XXXXXXXXX,
This letter is in response to your letters to the Colorado Department of Revenue, dated June 21, 2007, re:
exemption certificates. We apologize for the time it has taken to respond to your inquiry.
Issue
Will Colorado will accept an electronic version of the certificate or license which also includes an electronic
signature of the customer as adequate documentation for these types of transactions upon audit?
Background
You state that [company] developed a new system for documenting tax free sales and you ask for some
guidance regarding the department’s requirements. You offer the following background. [company] operates
over 900 retail stores nation-wide. Customers of point-of-sale transactions routinely request to make tax free
purchases because they are either exempt organization or they are making a purchase for resale. Your current
procedure is to have the customer complete a paper generic exemption / resale certificate at the register and
supply the following information: name of organization, address of organization, registration / permit number /
tax exempt number, name of person and title, driver’s license number, and phone number.
The new system captures all the information noted above, including the customer’s signature in an electronic
version. The customer supplies the cashier with the information and the cashier enters the information into the
system. The cashier then asks the customer to verify the information, which is displayed on a PIN pad. If the
information is correct, the customer then signs on the PIN pad. The system electronically records and stores
the signature. It appears from your description that the cashier is not required to ask the customer for a copy of
the exemption certificate or wholesaler’s or retailer’s sales tax license, and, if presented by the customer, it is
not reviewed nor copied and retained by the cashier.
Discussion
This system is a good step forward in automating the exemption process. In general, this system is acceptable,
with the following reservations which are I think are manageable. First, we ask that the cashier examine the
original or copy of the exemption certificate or wholesaler’s or retailer’s sales tax license. The information
contained on these documents is public information and readily available. Therefore, it is important that the

cashier actually view the document as one measure for ensuring that the person presenting the document is the
proper owner of the certificate or license.
Second, the cashier should verify that a retailer’s or wholesaler’s sales tax license is not expired. The
expiration date is stated on the license. A request for a sale tax free must be denied when the customer’s
license is expired. Exemption certificates do not have an expiration date.
Third, when a customer presents a wholesaler’s or retailer’s sales tax license, the cashier must exercise
reasonable judgment about whether the product being purchased is one that the customer is likely to resell.
[company] is a retail operation and it should be fairly uncommon for someone to have a legitimate intention of
purchasing a toy for resale. For example, a cashier should not approve a sale as exempt when the
purchaser/retailer, whose license identifies it as an office supply store or an automotive parts supplier, is
purchasing a child’s toy. Similarly, if a buyer requests a wholesale sale exemption for the purchase of only a
few items (rather making bulk purchases, which is more typical of a wholesale transaction), there is reason to
doubt the appropriateness of the exemption. Although it may be these are purchases for resale, there is reason
to doubt. When there is reasonable doubt about whether a transaction qualifies as a sale for resale, Colorado
law requires that you to assess the tax and instruct the purchaser to submit to the department a claim for sales
tax refund. By following this process, [company] can protect itself in audit and the department can ensure that
the license is not being improperly used.
I should also note that, in cases when a sale is allowed to be made tax free, the cashier must make a record
that describes of the product being purchased so that the Department can later determine what product was
purchased. For example, “toy” is not a sufficiently detailed description. In the absence of such a record, the
department will most likely find that [company] has not met its burden of establishing that the sale was exempt.
See, §39-26-703(4), C.R.S. (taxpayer claiming exemption has burden of proof).
Fourth, in the case of a customer presenting an exemption certificate, the department requires that the
purchaser complete an affidavit and follow certain guidelines. For example, the cashier must ensure that
payment is either by the organization’s check or credit card if the purchase is over $100. The cashier cannot
accept cash or payment by a credit card or check of the individual, unless the purchase is under $100.
You also ask whether Colorado accepts out of state exemption or resale certificates. Colorado accepts
exemption certificates and sales tax licenses issued by other states for purposes of making a sale tax free. For
more information on these subjects and an example of the affidavit, please see department publication FYI
Sales 1 and 3, which you can view and download from our web site at: www.revenue.state.co.us (go to
Taxation > FYIs > Sales Tax).
Finally, the department offers a number of great services to assist retailers when a customer presents a
certificate or license. The department’s Sales Tax Information System allows a retailer to verify instantaneously
whether a certificate or license is valid. You can access this system on the web at: www.revenue.state.co.us
(go to Taxation > Online Services > Sales Tax License Verification (which also includes certificates)). The online system gives you NAIC code assigned to the licensee, which will assist you in exercising due diligence
when asked by a buyer to make a tax free sale. You can also access this system via an automated telephone
system. (303)238-FAST (3278).
Finally, the Department makes a good faith effort to provide accurate and complete answers to questions posed
to it by taxpayers. However, the information and answers provided here are not binding on the Colorado
Department of Revenue, nor do they replace, alter, or supersede Colorado law and regulations. The Executive
Director, who by statute is the only person having authority to bind the Department, has not formally reviewed
and/or approved this response.
Respectfully,
Office of Tax Policy
Colorado Department of Revenue