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3 Tips for Managing Sales Tax Exemption Certificates

  • Jan 16, 2016 | Avalara

Missing or invalid sales tax exemption certificates remains one of the largest assessment areas under audit. If your customers' exemption certificates are invalid during an audit, you could receive significant fees, fines, and penalties.

Take control of your exemption certification management -- here are three tips.

1. Learn about tax-exempt organizations

There are roughly 2 million tax-exempt nonprofit 501(c) organizations across the United States, including:

  • Churches
  • Schools
  • Civic groups
  • Labor relations groups
  • Political campaigns

However, there also are many circumstances in which a nonprofit is required to pay or collect sales tax on a specific transaction or in general.

For example, in some states, exemption from paying sales tax is based on a nonprofit's nature and volume of sales activities. Or if a nonprofit is selling taxable items or services, this organization is required to collect tax.

Learn which organizations are tax-exempt, and which are not. By doing so, you can better understand which organizations require accurate, up-to-date exemption certificates.

2. Understand the Exemption Certificate Lifecycle

The Exemption Certificate Lifecycle is an ongoing process that goes from exemption certificate creation to expiration and/or renewal. It consists of three steps:

  1. Initiation of the certificate process: If a customer is not required to pay sales tax, this client will need to provide you with tax exemption certification. Collecting this certificate can be difficult if a customer does not know what documentation to provide. Fortunately, Intelligent Exemption Certificate Management (ECM) software minimizes this problem because it automates the process of collecting certificates. ECM software also notifies you when your customers have taken action on a certificate request and sent back a completed certificate.
  2. Ensure accuracy: Intelligent ECM software ensures businesses can track the status of requests. This software can even retrieve and provide copies of certificates to auditors, too.
  3. Approve or reject the request: Using Enterprise Resource Planning (ERP) or tax decision software in conjunction with ECM tools empowers users to streamline the Exemption Certificate Lifecycle. Ultimately, if ERP/tax decision software has accurate certificate data, then customers who are exempt from sales tax will be billed correctly. Conversely, if the information is inaccurate, tax-exempt customers will be billed incorrectly, and you'll face increased audit exposure and risk.

Remember, the Exemption Certificate Lifecycle never stops, so you'll want to do everything you can to manage it effectively at all times.

3. Track each customer's tax-exempt status

Did you know California issues sales tax registrations without expiration dates? Or that Florida requires sellers to renew these registrations every year?

Monitoring each customer's tax-exempt status can be challenging because registration legislation varies across the United States. Fortunately, Avalara CertCapture allows users to store customers' tax exemption certifications digitally in a single location. In addition, this service empowers users to create, collect, and retrieve any customer's exemption certificate in real time.

Manage sales tax exemption certificates, and you can limit the risk of receiving fees, fines, and penalties during an audit due to invalid certificates.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
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