Credits and rebills are top exempt sales challenges for businesses

Tax exemption certificates certify that an organization is not liable for a usually taxed product or service. In the not-so-distant past, businesses typically emailed or faxed certificates and had staff verify them. But with the speed of ecommerce today, customers expect efficiency and accuracy in all manner of sales, including exemptions. Suppose an organization makes errors or cannot validate a certificate in real-time at the point of purchase. In that case, they’ll most likely have to issue a credit or rebill — and most likely spark customer frustration.

Exemption credits, rebills, errors, and subsequent complaints tend to be top challenges for many small-to-medium businesses (SMBs) and emerging small businesses (ESBs). Too often, companies don’t think of the tax exemption process as part of the customer experience, but it is.

Let’s look at a few ways that poorly managed sales tax exemption certificates can hinder customer satisfaction and retention for SMBs and ESBs.

Delays could send your customers away

If you must delay customers’ purchases to handle exemption certificates, you’ll risk aggravating customers or losing them altogether. What if a customer needs your product or service for an important event or another deadline-driven purpose? Not all customers will wait around while you authenticate certificates.

Poorly managed exemptions can also decrease internal efficiency, costing needless time and money. Your staff could be working on other priorities rather than spending unnecessary hours fielding certificates.

Credits can lead to satisfaction deficits

If you can’t rectify an exemption certificate but want to push the sale through, you may have to charge the customer sales tax and then credit or refund the tax paid. But the customer likely won’t appreciate paying undue sales tax regardless of being credited later. If it’s a high-price tag purchase, an SMB or ESB may not have the budget to cover the tax, even temporarily.

Crediting the sales tax can be done one of four ways, and a customer may find any one of them bothersome. The first way to reverse incorrect payment of sales tax is to rebill the customer by creating a new invoice that will show the same items purchased but now marked as nontaxable and apply the credit to the invoice. You can then either apply the amount to a future invoice or directly refund it. The second option would be to modify the original invoice by changing the item from taxable to non-taxable. You can then assign a credit or process a refund. The third is to create a credit memo, and finally, the fourth is a 12-step process for entering a sales tax adjustment to zero out the sales tax.

If you haven’t refunded the tax before you’ve filed with your state’s revenue department, you’ll have to request a refund from them directly, which can be a complicated process. Customers can also request a refund on their own behalf — also a complex process and likely not one they’ll want to endure. Florida and Colorado provide good examples.

Customers don’t like bearers of errors

Depending on the industry and breadth of customer base, many SMBs and ESBs can find themselves overwhelmed with sales tax exemption management — upping the ante for mistakes. Allowing a tax exemption to slip through only to discover that it was invalid or out of date can trigger further delays and customer frustration.

Errors can also yield fines in the event of an audit. And more mistakes can mean more audits — once a small business is on an auditor’s radar, it’s likely to stay there.

Here are the top 5 exemption certificate errors:

• Missing signature
• Missing issue date
• Incorrect claim type/certificate not accepted
• Document not recognized by state tax authorities
• Incorrect addresses
• Incorrect state identification

Automation is an answer

Often SMBs and ESBs lack the resources or experience to manually manage sales tax exemption certificates efficiently and accurately. Delays, overpayments, and errors come more easily with manual certificate management. And those three obstacles risk customer satisfaction and retention. And errors jeopardize audit outcomes.

Automation can help streamline certificate management and diminish delays and errors. It can also free up resources, which can benefit a small budget in the long term. On average, ESBs spend $11,968 per month on sales and use tax compliance; SMBs dole out around $17,672 a month. Automating the sales tax exemption process could potentially lower related costs.

To dive deeper into sales tax exemption certificate management, visit Avalara.

Cover photo by Canva