Your business is growing. Well done! Sales are up and you’ve opened new offices and distribution centers in new locations to meet customer demand. Maybe you’re even offering new product lines and services. You may be thinking of reaching new markets through a reseller program.
All of this is great news and worth celebrating. But your sales tax situation has also just gotten a lot more complex. New locations likely mean new taxing jurisdictions, while new products or services can introduce varying taxability. All of this has also made the exemption certificate management process much more difficult.
Poor exemption certificate management processes tend to be ignored or tolerated until a company goes through a sales tax audit. During an audit, the state selects a sample period and requests sales documentation, including exemption certificates. The assumption is that findings for a select sample period represent standard operations for your business for the entire time frame under audit, and penalties are applied as such.
To put that in context, say you had $600,000 in sales for a one-month sample period. The auditor discovers a $15,000 exempt sales transaction for which the exemption certificate is missing or invalid. If the tax rate is, say, 8%, you’re looking at an unpaid tax bill of $1,200. But if the audit is for a 36-month time frame, the auditor will then apply that missing $1,200 in taxes across the entire audit period. Despite being for a single sale, that one missing certificate could end up costing over $43,000 in unpaid taxes!
In 2022, on average, Avalara’s Managed Services Team validated over 56,000 certificates per month; many required correction upon receipt. If not detected and resolved, invalid certificates can result in some serious financial consequences for a business.
So if you want to avoid nasty surprises come audit time, you’ll need to address the three main components of the exemption certificate management process and the challenges involved with each:
