4 ways exemption certificate noncompliance can hurt cash flow

During the pandemic, a broad shift to ecommerce became a lifeline for both businesses and consumers. As the world adjusts to a new normal, buying and selling online remains a reliable way of doing business. According to Statista, global ecommerce is projected to grow to nearly $7.5 trillion in sales worldwide by 2025.

Manufacturers are experiencing this on both ends, fulfilling orders and purchasing goods via online transactions. Many have also shifted into the retail space by selling directly to consumers. 

While broadening vendor pools and customer markets can make for increased agility, these strategies can also create complications for sales tax compliance — especially when it comes to exemption certificates.

Mismanaging exemptions can be costly. Here are four ways improper certificate management can hurt your bottom line:

• Not exempting tax can create payment delays
  
• Poor customer experience can cause loss of sales
  
• Missing documents can result in fines and penalties
  
• Noncompliance can lead to unnecessary tax payments
  

When sales tax is incorrectly applied to a sale, payment delays often follow. The buyer will likely contact accounts receivable to request an amended invoice. This not only creates additional work for the accounting department, it also means the outstanding balance remains unpaid. 

Any time goods have been shipped and an invoice goes unpaid, the business is operating at a loss. Collecting digital versions of exemption certificates at the point of sale and properly exempting tax is one way to reduce invoice errors.

Digital certificates can also be easier to store and access for future purchases, as long as they’re still valid.

There’s a reason one-click purchasing was a valuable patent for Amazon: Customers want the purchase process to be an easy one.

From finding the goods a buyer needs to completing checkout, any point of friction is an off-ramp for the purchase. A complicated tax exemption process throws barriers in front of customers (for something they’re entitled to) and may be enough to send them looking for other vendors.

On the other hand, smoothly incorporating exemptions into your purchase process can help give you a competitive edge. Businesses will appreciate the expediency and reliability of routinely exempted sales.

Perhaps the most obvious way noncompliance can affect your business is in the event of an audit. In addition to missing documents, noncompliance includes:

• Using expired certificates on new purchases
  
• Having the wrong certificates on file
  
• Accepting partially or improperly filled documents
  

In any of these cases, an auditor can assess back taxes, penalties, and fees. 

In some cases, auditors use a statistical sample to assess a broader period. For example, if you’re being evaluated for three years, an auditor may select a representative three-month period. Any violations within that quarter are applied to the 36-month assessment. Which means a $2,000 error could cost your business $24,000 plus any penalties, interest, or fees.

On behalf of your bottom line: Ouch!

So those are certificate risks  for sellers, but what about the risks for buyers?

If you’re making tax-exempt purchases, you must make sure you have proper documentation at the point of sale. Because the vendor is on the hook for any owed tax, they can reject your tax exemption if your certificate is expired, incomplete, or invalid.

If you don’t have the right documents, you’ll need to pay the sales tax, then request a refund from the state. Depending on the size of the tax bill, this can be merely annoying, or hugely inconvenient. After all, it’s not likely you’re in the business of making interest-free loans to state governments. 

One of the easiest ways to obtain and manage proper exemption certificates is through automation. Whether you’re buying exempt goods or selling to exempt buyers, Avalara has you covered. 

Avalara Exemption Certificate Management helps you collect certificates during checkout. You can store certificates in a secure, cloud-based database, where they’re easily accessible for future purchases or audits. You’ll also get alerts when certificates are about to expire, so you can request new ones from customers ahead of recurring sales.

Avalara Vendor Exemption Management helps you manage your own exemption certificates and easily supply them to your vendors. Through automation, you can more easily manage vendor information, centralize documents, and maintain valid certificates.