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Sales tax, use tax, transaction privilege tax…

Whatever your state calls it, you have to collect it.

Unless, of course, you’re a retailer selling items directly to certain government entities. Or you’re distributing goods to buyers who plan to resell them. Or the widgets you manufacture will be purchased for use in larger pieces of merchandise.

In these and many other circumstances, you’ll need to collect exemption certificates. And not just any certificates—each client or customer will have to complete the correct form as dictated by state law and the type of transaction.

So, yes, it can sometimes feel like you’re asking for a background check on the first date.

If it never seems like quite the right time to request an exemption certificate, or if you’ve been putting them off to deal with later, this post is for you. Keep reading for the answers to five common questions about when and why you really need to collect exemption certificates.

When do I have to collect an exemption certificate?

If you have nexus, and if you don’t charge a customer sales tax, you must collect an exemption certificate. There are no exceptions to this rule. If you don’t maintain a record of why you didn’t collect sales tax, your company could be held liable for that cost in an audit.

The information you’re required to verify and keep on file varies by jurisdiction. But no matter what the form looks like, when you collect it is consistent across states. You should require a certificate every time:

  1. A new tax-exempt customer is buying from you for the first time
  2. A certificate you have on file for an existing customer is invalid or is about to expire

In some cases, you may also need to follow up with customers who submitted invalid forms. This can happen in tax jurisdictions that require a lot of information, which makes it easy to overlook fields on longer forms.

When should I ask for a certificate?

Ideally, at the point of sale. While most states offer grace periods following tax-free transactions, there’s always the risk that a forgetful or busy client will mistakenly fail to follow through.

In fact, if you’re a retailer, there’s no good reason not to collect exemption certificates immediately. Today’s buyers are conditioned to fill out forms and will be grateful for easy-click online checkout options or fast access to the right documents when making a purchase in person.

Why not just wait?

Put simply: The longer you wait, the greater your risk for incomplete and missing documents in the event of an audit. While many states will give you 90 days to collect a certificate after the sale, a lot can change within three months.

The economy could sour and cause businesses to close. And if the company from which you’re seeking exemption certificates changes its name or is on an extended staff retreat in the Bahamas, you’re out of luck.

Are there exceptions?

Not really. But there are some circumstances where some flexibility is possible.

For example, many of the businesses we work with here at CertCapture are hesitant to push forms when a client claims an exemption and promises to send the correct documentation later. In this circumstance, you might choose to give the customer 30 days to send it and indicate that the next purchase will be taxed if they fail to deliver.

This will allow you to remain customer-friendly while still preparing the company for a potential audit.

OK, you have my attention. But…who should collect them?

For many years, tax teams were responsible for following up with customers and collecting exemption forms.

Then companies started to realize how much faster they could collect certificates by shifting that responsibility to:

  • Webmasters and IT personnel who set up online shopping carts
  • Credit departments that are responsible for collecting new customer information
  • Sales teams that regularly interact with customers one-on-one

Equipping your employees with the right software and training them to recognize when it’s time to ask for a certificate will make things easier on everyone.

Don’t wait for an audit to start asking customers for sales tax exemption certificates. Making them a priority today can save you a lot of time and money in the future.

Looking for more tips to handle sales tax exemptions? Stay tuned. I’ll be sharing some exemption certificate scenarios and stories from my time as a state auditor—right here on the Avalara blog.

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