For almost every business, managing sales tax exemption certificates represents a critical but sometimes overlooked aspect of sales tax compliance. When performed manually, the process is often time-consuming, labor-intensive and error-prone. This is especially true of processes that remain reliant on paper documents and physical storage. Are your clients at risk because of their current exemption certificate management process?
The expanded obligations associated with economic nexus, when combined with an increasingly intense audit landscape, put even more pressure on organizations to adopt efficient, sustainable and expandable exemption certificate management processes.
In a sales tax audit, the cards are stacked against your client. This is especially true for companies that work extensively with exempt customers or customers who have permission to purchase things tax-free based upon how they will use them.
When selling otherwise taxable products or services, an auditor will presume tax should have been charged unless the seller can proffer a properly completed and appropriately dated exemption certificate. If the document is in their hands, the pressure is off. An auditor will generally accept a certificate taken “in good faith” and move on. However, if the document can’t be found or is not properly completed, an assessment becomes a distinct possibility.
Each state has its own repository of exemption certificates with unique rules and requirements. Some certificates are perennial, meaning your client can keep them on file as they continue to do business with the holder. Other certificates expire, meaning the seller must obtain a new certificate from their customer every so often.
Practically, states sometimes vary on what fields of an exemption certificate are required to be completed and what might simply be “nice to have.” There is some uniformity. All the member states of the Streamlined Sales Tax Agreement must accept the Streamlined Sales Tax Certificate of Exemption, which is currently undergoing a bit of an overhaul. Many states also accept the Multistate Tax Commission Uniform Sales and Use Tax Resale Certificate. Even with this uniformity, one look at the laundry list of qualifiers appended to the Multistate Certificate demonstrates that certificate management remains far from easy.
Best Practices for Managing Sales Tax Exemption Certificates
We’ve compiled several best practices for helping your clients manage sales tax exemption certificates in a way that keeps the organization safe while minimizing the pressure on existing staff.
A recent Sovos survey found that 80% of SMBs said the financial penalties flowing from an audit was their biggest fear if a mistake was made in their sales tax compliance process. Sellers cannot fully control the chance of being audited but having your properly completed exemption certificates easily accessible can give your clients some peace of mind when the auditor calls. More importantly, sellers that demonstrate that they have a buttoned-down and accurate tax compliance process in place substantially reduce the chance of a second audit in that same state.
Opt for scalability
Organizations should consider both their current and future needs when looking for an exemption certificate management solution. As noted above, nationwide economic nexus standards that predominantly consider “gross” sales can create compliance obligations for companies, including certificate management, even if they sell primarily to exempt customers.
However, remember the likely possibility of business expansion. Selling new products, through new channels, into expanding geographies will undoubtedly strain a poorly conceived certificate management process. A scalable solution allows a company to expand confidently, knowing new certificates, from new customers, in new states will not represent either a compliance challenge or increase audit exposure.
Look to the cloud
Businesses can greatly reduce the costs of building and maintaining a solution by utilizing cloud-based or software-as-a-service (SaaS) models. This approach offers a low up-front cost with minimal continuing IT support when it is executed correctly and with the right SaaS partner. The proper SaaS software solution will:
- Centralize all your existing and new certificates in the cloud where they can be readily accessed when needed
- Evaluate certificates for completeness
- Seamlessly integrate with your tax determination solution, ensuring customers are properly exempted when an active certificate is on file
- Request new certificates from customers before the old one expires
Focus on the end customer
Tax compliance should not be a barrier to commerce. Your clients do not want to deal with irate customers calling about inaccuracies on their invoices or complaining about their struggles in uploading their certificates. They want something easy and accurate. If you provide them with something complex and cumbersome, they may search for another supplier.
Effective exemption certificate management is not easy, but it’s by no means impossible. Thoughtful tax advisors will understand the need for accurate certificate management, the criteria their clients should consider and the common pitfalls to creating a scalable and accurate solution to support core business requirements.