The Absolute Beginner's Guide to Exemption Certificates for Sales Tax Compliance

Has your company made exemption certificates a priority? Are you adequately prepared for a sales tax audit?

Many businesses think they’re fully documented, organized and ready...until the audit notice arrives and the company suddenly realizes it should’ve had a better process in place. In retrospect, this organization wasn’t prepared for the fact that even a handful of invalid or missing documents can have a very costly impact.

That’s the bad news. The good news is that it’s completely preventable.

To achieve and maintain sales tax compliance, you must first understand how exemption certificates work, when to collect them and what steps you can take to keep them up to date.

Why are exemption certificates so important?

Exemption certificates should be a top priority for all wholesalers and manufacturers, and may require extra attention if your organization:

• Records reams of in-store or online business-to-business transactions
• Sells numerous products and services to vendors in multiple states

All customers who claim they don’t have to pay sales tax—whether it’s teachers buying a few basic classroom supplies or vendors purchasing products in bulk—must have up-to-date exemption certificates on file.

Not most. Not many. All.

The simple truth is this:

There’s no way to predict which records an auditor will ask for. Your company could be 95% compliant, but there’s still a chance you’ll be asked to pull records for the 5% of accounts with incomplete or expired certificates.

In these instances, the auditor might give you a grace period for updating your records. But what if the customer is no longer in business or changed its name? You’d have no way of obtaining it.

And if you’re still maintaining records manually—as many organizations do—keeping the mounds of PDFs and papers updated is no easy feat. Even a homegrown certificate collection software system can cause major headaches if it doesn’t adapt to changing needs as your customer base grows and tax laws change.

Which brings us to the next question...

What, exactly, should you be collecting?

The answer to this question will be determined by several factors, including:

• The type of transaction
• Your business location
• Current state tax laws

Our free certificate library offers one way to quickly locate appropriate documents, but keep in mind that even these may be impacted by nexus and tax law changes.

Where and when should you be collecting certificates?

Ideally, tax exemption certificates are initially collected at the time of sale. This requires equipping sales associates with fast and easy access to the correct documents and processing systems. Many companies are beginning to offer tax exemption options in their online shopping carts, too.

After new customers’ certificates are verified, it’s your responsibility to keep their records current and provide ample notice when it’s time to replace an expiring certificate with a new one.

How are exemption certificates managed?

This is by far the most time-consuming part of the compliance process. There are always new certificates to verify, incomplete ones to follow up on and expiring ones to replace—not to mention thousands of records to sort through should an auditor come knocking at your door.

Traditionally, companies have stored paper versions of exemption certificates in metal filing cabinets. Some scan and save PDFs. While these efforts might still work at a smaller company with a limited number of documents to obtain and store, more and more businesses are automating the entire process.

So…

Now that you know why exemption certificates are so crucial to maintaining tax compliance, how will you improve current processes at your business? If you’re not sure where to begin, our Exemption Certificate Survival Guide is a good place to start.

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