The Easiest Way to Manage Your Tax Exemption Certificates

By Tom WeissDecember 22, 2020

Regardless of the products or services you sell, managing tax exemptions is a complex undertaking for you and your customers. The nature of tax exemption certificate management often provides for confusion and frustration, leading to audit risk and ultimately resulting in penalties and additional expenses. Setting up and maintaining a comprehensive system that collects, validates, and renews your tax exemption certificates is the foundation to steer clear from easily avoidable pitfalls.

“States have developed and successfully deployed sophisticated compliance enforcement measures.”

It is not a secret that states have developed and successfully deployed sophisticated compliance enforcement measures to maximize revenue through fines and penalties. Sales tax auditors often target reviews of exempt sales to uncover general non-compliance, such as missing, invalid, or expired tax exemption certificates. These are often low hanging fruits for auditors, as it can lead to steep penalties with very little effort required on their end. While most businesses are aware of the pain of back taxes and penalties, fewer are aware of the hidden costs of non-compliance including damage to a company’s reputation and relationships with its customers.

No matter how you handle your tax exemption certificates, whether the good old manual way, a proprietary system, or a sophisticated third-party provider, it is crucial to address all relevant complexities. After all, tax exemption certificate management can be a win-win or lose-lose situation.

Get the Correct Forms Filled out Correctly

Getting it right is easier said than done – as a starter, ensure that your customer elects the correct tax certificate form, fills out the form correctly and that the exempt purpose relates to the actual sales transaction.

Using the correct form

There literally hundreds of tax forms to choose from. Picking the right form for one particular purpose is not easy and can feel like playing the lottery. Many purchasers are lost on that topic and often end up choosing the wrong tax certificate form, which is often the first issue leading to non-compliance for you and your purchaser.

Filling out the form correctly

Once the first hurdle is overcome and the correct form has been selected, your purchaser then needs to fill out the form correctly. Unfortunately, some states have mastered the complexity of their forms to the degree of rocket science. Certain forms are sprinkled with, sometimes hidden, dependencies over dependencies and if you are not an expert-tax-exemption-certificate-form-filler, then chances are that your good intentions and efforts are not yielding the desired result.

“Roughly 42% of sales tax audits identify issues with exemption certificates”

The Culprit Eliminator

The best approach to avoid tax exemption certificate errors is to point your purchasers to the correct form and guide them to fill out forms correctly in the first place. Going this route will not only mitigate compliance risk but also eliminate the frustrating back and forth between you and your purchaser.

However as a word of caution: ensure that you are not providing tax advice as it is still the responsibility of the purchaser to provide you with the form and correct content – not the other way around. There is a fine line you have to be aware of when guiding your purchasers through.

Most sellers are not equipped to provide this level of support, which is where a solid third party exemption certificate management (ECM) provider can add tremendous value.

A good service provider should offer you a platform, which directs your purchasers pick the correct form as starting point. Once the form has been selected, your ECM provider should then guide your purchaser to fill out the form completely by including all necessary fields such as signatures, dates, registration numbers and any required purpose or business descriptions. Ideally, this should be accomplished through a user friendly questionnaire and intuitive process.

“Reduce your audit risk, provide a better customer experience and free up resources”

You are in the driver’s seat to eliminate a major pain point for you and your customers. A frustration free transaction will not only build trust and reputation, but it can ultimately lead to increased revenue through recurring sale and future business.

Most importantly however, not being prepared for an audit can be a very costly mistake. According to a recent study by Wakefield Research, roughly 42% of sales tax audits identify issues with exemption certificates. Taking into consideration penalties, back taxes, interest, costs of an audit defense and lost productivity, a typical negative sales tax audit can cost even a small to medium sized business more than $114,000.

Being compliant is easy.

EXEMPTAX is the leading platform to provide a true hands-off approach for you and your tax exempt customers by ensuring that every single certificate which is generate through EXEMPTAX is completely filled out. Guaranteed!

Don’t just take our word for it, but simply click on the button link below to get a quick feel of how such a flow integrated into your company systems can reduce the pain of managing exemption certificates.

EXEMPTAX enables your business to streamline handling of resale and sales tax exemption certificates, helping to reduce your audit risk, and save time and money. Schedule A Demo Today!

Sales tax rules and regulations change frequently. Although we hope you'll find this information helpful and informative, this blog is for informational purposes only and does not provide legal or tax advice.