5 Tips for Exemption Certificate Survival

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Posted by: briansittley Comments: 0 0 Post Date: October 16, 2014

avalara_picIf you sell or have nexus in multiple states, then you know how complex filing taxes and maintaining exemption certificates has become, and this post if for you.  Our friends at Avalara, the online sales tax experts, have produced a white paper in which they outline five key things a business should do to ensure they are in compliance with all the various state requirements for exemption certificates.  Here are a few of the things that most commonly go awry:

» Missing a signature or does not include a signature of an accepted signer

» Missing an issue date

» Incorrect claim type or any certificate not accepted

» Document not recognized by the state authority

» Includes name or address other than the direct buyer and seller

» Showing State ID applicable to the wrong state

Avalara lists five “survival tactics” for increasing efficiency, avoiding waste and lowering the risk of the all too common audit fines and penalties (and if you’ve been through an audit, you know what they’re talking about):
Survival Tactic #1 —Understand the nature of the exemption – Sales can be exempt for many reasons based on the nature of the use, the goods or services, or the buyer.  The more products sold, the more risk and difficulty.  To dos include:

» Create systems to track changing rules regarding the tax-exempt nature of each transaction.

» Track sales tax holidays, product and service related exemptions, and exemptions based on use.

Survival tactic #2 —Determine validity of exemption certificates.  Which form?  What jurisdiction?  What needs to be on the form?  To dos:

» Review exemption certificates submitted and ensure they contain key elements including type of exemption, names & addresses, descriptions of goods, tax number, signature.

» If the state you’re dealing with is one of the 23 SST (Streamlined Sales Tax initiative) states, use the recommended forms.

Survival tactic #3—Know the rules.  Tracking tax-exempt transactions based on use, tax holidays, and source of the transaction requires super human strength and agility.  To dos:

» The Sales Tax Institute publishes a list of sales tax holidays by state.

» Know whether to collect a resale or exemption certificate and whether one form can be used for both.

Survival tactic #4—Determine product and service-related exemptions.  Tax rules change constantly as states seek more sources of revenue.  Over and under charging sales tax can result in a higher audit risk.

» Review taxability matrices available on many departments of revenue websites here.

Survival tactic #5—Automate.  Manual tracking of exemptions and sales taxes is not only time-consuming and cumbersome, it also raises the risk of audit.  Something as simple as automatically tying each exemption certificate to each transaction can save hours of time and reduce risk of fines and penalties. Other advantages of automation include:

» Automates collection

» Tracks the progress of collecting certificates

» Helps to ensure the completeness of certificates

» Eliminates lost certificates

» Tracks certificate expirations

» Improves the exempt customer experience

This, of course, is Avalara’s specialty (why else write a whiter paper?).  You can find them at www.avalara.com.  We work with them, so we’ll be happy to introduce you, or forward you a copy of their white paper.  Just ask.

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