The Low Hanging Fruits of Sales Tax Exemption Compliance

By Tom WeissJuly 21, 2020

It is a common misconception that the party responsible for handling sales tax exemptions is always the purchasing party. This is a dangerous misunderstanding, which can lead to expensive penalties. Remember that auditors are focused on finding issues and errors and you should ensure to protect yourself to avoid costly issues at time of audits.

Everyone dealing with sales tax exemptions should be aware of some fundamental culprits – regardless whether you are the purchaser or the seller.

If you are the purchaser, then follow some of the best practices when purchasing goods or services through issuance of sales tax exemptions to ensure you are not on the hook for future audits.

  • Most purchasers are not keeping track of their issued sales tax exemptions, which is a risky shortcoming. Having a robust archiving system in place to produce previously issued sales tax exemptions is vital to ensure to know exactly what kind of document was issued to whom at what time and for which purpose. General changes in laws or simple updates to thresholds occur frequently and you should ensure to adapt your sales tax exemptions accordingly. In addition, you should keep up with changes pertaining to your business as well. Entity updates or other business-related changes are not uncommon, and you should be aware of the impact to your sales tax registrations numbers among other potential issues.
  • Ensure that you limit the authority of issuing sales tax exemption certificates to a small group. The authority to issue these types of documents is usually confined to CPA’s or heads of finance or accounting departments – and that for a good reason. While it might seem that funneling those activities to a few people only is creating a bottleneck, keeping taps on your segregation of duty and accountability is a wise investment in the long run.
  • Make sure that you have a clear and holistic visibility of your seller accounts. If you engage with a seller, who is offering a variety of goods and services, ensure that you keep detailed track of which of your sales are explicitly exempt from sales tax. Not all sellers are always accepting the broader range of sales tax exemption certificates for all purposes. Don’t assume that you are covered but ensure it by simply issuing new exemption certificates if in doubt.

If you are the seller, you have an equal obligation to ensure that your exempt certificates are accurately filled out and issued for the purpose of your sale.

  • One of the biggest challenges is to ensure that you know how your teams is validating exemption certificates. In addition, you should always ensure that correct validation rules and protocols are consistently and accurately applied – every time. Especially if you have a larger nexus footprint, being aware of applied validation protocols is a difficult undertaking. You could enforce strict segregation of duties and channel the validation tasks for exemption certificates to a small team of experts or alternatively try to apply a difficult balance of micromanagement and quality control to your team members. Neither approach is great. The better option is to simply take advantage of a service provider who offers enforcement of validation protocols across all of your team members via a SaaS platform. This way you can enable your broader team to perform validation tasks while ensuring that you control validation  protocols among all of your team member consistently.
  • Avoid guiding, directing or otherwise consulting the purchasing party through the issuance of a sales tax exemption certificate. While it might seem tempting to go that route in order to close a deal or finalize a transaction, you might be voluntarily taking on a significant portion if not all of the liability. In other words, a good deed might go bad quickly. Instead the purchaser should provide exemption certificates self-sufficiently with the help of their internal CPA’s or tax advisers. Make sure to draw a strict line regardless how big the deal or transaction.
  • Keep up with your customer master records and ensure to capture any changes regarding customer names and sales tax registration numbers. Things do change over time and while some exemption certificates are valid for multiple years, you might be sitting on invalid exemption certificates if you are not keeping up with changes. Many sellers simply mitigate this risk entirely by requesting new exemption certificates each year regardless of state law mandated expiration terms. The benefit of having valid exemption certificates on file usually outweighs the extra effort of validating yearly exemption certificates.

Keep in mind that that there are many other factors to take into consideration to ensure compliance when accepting or issuing sales tax exemption certificates.

Being aware of the low hanging fruits however is the first step to ensure that you, your business and your business partners are compliant with their sales tax exemptions.

The best way to minimize your tax obligation and audit exposure is to ensure you collect and validate all of your tax exemption certificates accurately and renew them on time with strong internal processes and end-to-end resale and tax exemption management platform. Consider partnering up with a tax service provider who fits your business needs in terms of usability, cost and commitment. 

Test drive EXEMPTAX and sign up for your FREE PLAN without any obligation and start minimizing your audit risk immediately.

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.