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Best Practices for Managing the Sales Tax Exemption Process

  • Feb 7, 2016 | Suzanne Kearns

According to Michael Fleming with Peisner Johnson and Company, many state auditors have become more aggressive in the past seven years as states look for ways to make up for lost revenues due to the sluggish economy. And one of the ways they’re doing that is with tax exemption audits. He says that if exemption certificates don’t have “every “i” dotted and “t” crossed,” they are being denied in audits.

With enforcement for the certificates getting stronger, it only makes sense to do all you can to manage yours properly. After all, if you can’t produce a legitimate exemption certificate when asked by an auditor, you will be responsible for paying sales tax on the sale, plus interest. Here are some tips on how to stay in compliance when collecting tax exemption certificates.

When to Accept Tax Exemption Certificates

If you sell tangible personal property, chances are you’re required to collect sales tax from your customers. But most states exempt certain type of entities or transactions from sales tax. For example, in most states, groceries are exempt from sales tax by statute and sellers are not required to collect exemption certificates because the statute applies to everyone. But if someone buys products in order to resell them, they will need to provide an exemption certificate to prove they aren’t required to pay the tax.

How to Manage Your Tax Exemption Certificates

Because every state’s laws are different regarding tax exemption certificates, it’s necessary to have a well-designed exemption management system in place. Here are some tips on how to best run yours.

  • Knowledge is power. In order to comply with regulations, you must first understand them. Make sure you are well versed in the rules for every state you do business in where you accept tax exemption certificates from your customers.
  • Choose a go-to person. Decide who in your company will manage the tax exemption certificates, thoroughly train them, and then make them responsible for the process from beginning to end. When one person is responsible for ensuring the accuracy of the certificates, errors are less likely to slip by.
  • Make sure each certificate is validated. Your go-to person should never accept the customer’s assurances that the certificate is valid, but instead thoroughly check it themselves. This is important because even a small error like the transposition of one digit on a certificate can cause an auditor to deny it, potentially costing you a lot of money. The certificates should be checked for the proper invoice date, expiration date, matching customer information, and signature.
  • Automatically update your certificates. It can be difficult to keep up with the expiration dates of all your customer’s certificates, but if you make a sale using an expired one, you could be held responsible for the taxes. To ensure this doesn’t happen, set up a schedule that helps you automatically update your certificates every couple of years.

Remember, if keeping up with the day-to-day tasks of running your business is all you can handle, you can automate the process of staying on top of your tax exemption certificates with solutions like Avalara CertExpress. It might not be a bad idea considering a high rate of exempt sales is in the top three reasons businesses get audited for sales tax.

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.
Avalara Author
Suzanne Kearns
Avalara Author Suzanne Kearns