Managing Exemption Certificates – the importance of validation

Valid exemption certificates from your customers are critical in managing your overall sales tax risk. Yet a surprising number of companies have inadequate processes to receive, validate, maintain, and update exemption certificates.

Under audit, an otherwise exempt sale will be deemed taxable without such documentation. That leaves you open to liability.

In this blog we will examine four best practices to manage your exemption certificates so that doesn’t happen.

1. Review your files

Determine whether you have any missing exemption certificates. Review your records as an auditor would by looking for exemption certificates that align with exempt transactions. Many companies can’t accurately say what their own risk is regarding exemption certificates. It’s difficult to solve a problem you’re not aware of.

Get granular to understand your risk by state and by customer. You could do this manually,or preferably you could find a tool to automate this maintenance. (Especially if you have 1,000+ certificates to track).

States’ exemption certificates also change frequently, and even “evergreen” ones should be updated at least every three to five years for the latest customer contact information.

2. Streamline customer submissions

How many times have you had a customer short-pay an invoice and then produce their exemption certificate, resulting in an overpayment of sales tax to the taxing jurisdictions? Get that certificate up front.

Allow customers to submit documentation in the most convenient manner possible. Whether that is via mobile device, fax, or upload. Not only is that easier for them, but you will get more certificates.

Automation in this process also allows for faster turnaround of exemption certificates and lowers the risk of shopping cart abandonment.

3. Plan across

There are a lot of moving pieces to consider: sales, order entry, billing, credit, tax, customer service, etc. Have a clear plan that identifies which group is responsible for moving an incoming exemption certificate along the process from customer onboarding, through billing, and including the tax department in the event an auditor requests copies of certain certificates.

Define responsibilities beginning with the acquisition of certificates, review of certificates for validity and the granular application of the exemption to the item purchased. Take whatever steps are needed to ensure all exempt customers aren’t actually exempted until you have the documentation on file.

Automation can be beneficial in this process, a tool that specializes in this can help keep you organized and reduce your risk/liability.

4. Beat auditors to the punch

Corporate taxpayers are held to a “good faith” standard when accepting exemption certificates and applying sales tax exemptions to their sales. And “good faith” is every bit as nebulous as it sounds.

Because that standard is ambiguous, you want to show auditors that you have solid business processes around exemption certificates. You want auditors to recognize that you are doing more than the average taxpayer and that you take this documentation seriously. Develop a process that unambiguously exceeds the good faith standard.

See our “Expert View - Exemption Certificate Management, Audits, and more!” webinar with CERTifyTax founder and CEO Tom McCarthy and COO Ray Diaz as they discuss best practices in exemption certificate management.

This blog was written in part by TaxConnex partner, CertifyTax. To learn more about how TaxConnex and CertifyTax can take sales tax compliance off your hands, get in touch!