Communications businesses need an exemptions management system built for multiple tax types

This post has been updated. It was originally published in December 2022.

Flipping a coin is a simple way to decide between two options, like which team gets first possession of the ball. Whether the call is heads or tails, the outcome is clear. But tax compliance is complex, and a single option isn’t always enough. Businesses that sell communications products and services need an efficient way to manage exemptions for multiple tax types. Even if you rely on technology to help, if your platform only handles sales and use tax exemptions, you could be at risk of audit penalties that cost much more than nickels and dimes.

Let’s start with a quick breakdown of some different situations in which your customers might be tax exempt.

Customers that are exempt from sales and use tax likely need to provide you with a sales tax exemption certificate and typically fall into two categories: 1) resellers that buy your products or services wholesale and 2) charities, nonprofits, and government agencies.

Communications tax exemptions are trickier. While you’ll need to collect exemption documentation, it can be difficult to keep track of which customers are exempt from which charges, and which charges they owe. Many of the items on a customer invoice are fees and surcharges for which exemptions don’t necessarily apply. Nearly everyone funds 911 services and pays Universal Service recovery charges, for instance. In the case of pass-through surcharges, you may have discretion to not collect from anyone you choose. However, you likely still have an obligation to pay the underlying expense, which has now become an absorbed cost. Does your margin cover absorbing Federal Universal Service Fund costs? Probably not.

Some states grant special exemption status to qualifying businesses. Let’s say you provide phone services to a company for both its headquarters and a manufacturing plant. The manufacturing facility might be tax exempt due to its special status. But the company is still liable for communications taxes and sales and use tax on the phone services used at its headquarters. If you’re sending combined phone bills, you’ll need a way to differentiate between which charges are taxed and which are tax exempt.

It's up to you to make sure your customers send you the right kind of certificate (or certificates) for each transaction and to validate that the information they provide is accurate.

An exemptions management solution that handles both sales and use tax and communications taxes can help you keep track of necessary documents. With automation, it’s easier to collect the right forms from your customers and ensure you provide an exemption only when you have a valid certificate.

Exemptions are automatically applied when your exemptions management solution is integrated with your tax calculation solution. Choose a system that supports line-level exemptions on invoices (e.g., one item is exempt from sales tax, another is exempt from communications tax, and a third is taxed). If your system doesn’t, you’ll have to manually map exemptions to transactions, which can be a huge burden.

It’s even possible for a platform to keep track of certificate expiration dates and send reminders to your customers. When you’re able to manage and access your documents from a central repository, it’s easy to find certificates when the auditor comes around.

If you’re still deliberating whether exemption certificate automation is right for your business, skip the coin toss and talk to a communications tax compliance expert. They can explain how a multi-tax exemptions management solution like Avalara Exemption Certificate Management can help you save time and reduce risk.

To learn more about this topic, read our blog post, Managing communications tax exemptions can be particularly challenging.