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.
