Automating Sales Tax Exemption Certificate Management

Prudent and proactive businesses are constantly investigating and implementing new methods to reduce their sales and use tax audit liability and increase staff productivity since these savings go directly to the bottom line. In today’s economic environment, these goals have taken on added urgency. With virtually all states experiencing significant revenue drops and higher demands for state services due to the slow economy, states are being very aggressive in their sales and use tax audits to help increase their revenues. Astute businesses have already, or are in the process of making moves to reduce their own sales and use tax liability risks to lessen the pain and dollar amount of an assessment.

The slow economy has shrunk top line growth for many companies causing them to look to cost cutting to maintain or slow decreases in the bottom line. Once again, proactive managers realize the importance of providing the tools their businesses need to be more productive and to adopt sales and use tax best practices that further reduce costs and audit liability.

Businesses that are best prepared to handle this type of environment have implemented Exemption Certificate Management (ECM) software to automate the collection and management of certificates and have integrated this software with their Enterprise Resource Planning (ERP)/billing and tax decision software to complete and automate the “Exemption Certificate Lifecycle.”

Automating this process is not only critical for manufacturers, wholesalers and retailers, but also for businesses in any industry with sales tax exempt transactions, no matter the sales channel. The most powerful ECM solutions can handle the collection and management of certificates in direct, retail, e-commerce, POS and tele-sales channels simultaneously and in real time.

By connecting these systems, each is able to share critical data needed to reduce nontaxed transaction audit risk, increase productivity by automating manual certificate processes and improve the exempt customer purchase experience.

Understanding the Exemption Certificate Lifecycle

The Exemption Certificate Lifecycle is the recurring process exemption certificates go through from their creation, to their ongoing use in future transactions and audits, to their renewal when they expire or are classified as invalid.

There are three primary components of the Exemption Certificate Lifecycle: ECM software, ERP or billing software and tax decision software. All three are critical for minimizing non-taxed transaction audit exposure, increasing staff productivity and improving the exempt customer purchase experience.

The Exemption Certificate Lifecycle consists of three primary steps initiated by a sales or invoice origination and certificate request, but thereafter, the cycle really never stops.

1. Initiation of certificate process

The first step begins with the customer and the ERP software because this is where sales and invoices originate. When customers are exempt from sales tax, statutorily the seller needs to collect an exemption certificate from them. However, often times customers do not know what documentation to provide and those taking the order do not have the certificate expertise to know which documentation they need. In addition, the certificate collection process itself can be time consuming because of the lack of knowledge on both sides or due to a lack of process on the seller’s side, resulting in a poor customer purchase experience.

2. Ensuring accurate collection

In the automated Exemption Certificate Lifecycle, these issues are solved with intelligent ECM software. Customer data is passed to the ECM software and requests for certificates are automatically sent to customers. Intelligent ECM software will track the status of requests and help ensure customers provide only valid certificate information for their transactions. Intelligent ECM software can retrieve and provide copies of certificates to auditors.

In addition, ECM software serves as the “source of truth” for certificates and will manage certificates, including tracking certificate expirations and certificates that have been deemed invalid. The management of all certificate data plays a critical role in the tax decision software.

3. Communication with tax decision software

The ERP software interacts with the tax decision software because it needs to know what tax amount, if any, it needs to apply to invoices for customers. If the tax decision software has accurate certificate data, then customers who are exempt from sales tax will be billed correctly. If not, then not only will exempt customers be billed incorrectly but the seller is also increasing its audit exposure and risk.

Three Software Components Needed to Automate the Exemption Certificate Lifecycle

Three software components are necessary for automating the ECM lifecycle: ECM software, tax decision software and ERP or billing software.

1. Exemption Certificate Management Software

Generally, ECM software can be broken into two types: standard and intelligent. Exemption certificate management can be performed in-house or in many cases, outsourced. The workings and benefits of the Exemption Certificate Lifecycle apply in either case.

Standard ECM software

  • Is often a desktop-based software — Desktop-based software requires installation on the computers of the staff and usually requires routine maintenance to ensure the latest version is installed, which may mean purchasing and installing additional releases of the software. It also means the software cannot be accessed from anywhere other than your desk (no remote office access, no home access, no access when traveling and no direct access by auditor).
  • Digitally stores exemption certificates — Certificates are imaged, indexed and quickly located, eliminating paper and the need for filing cabinets to store certificates.
  • Assists in the collection of exemption certificates —In many cases standard ECM software displays which customers have been sent certificate requests, the date sent and whether a certificate has been received.
  • Provides reports to assist in the management of certificates — Reports usually provide details about customers and their certificates and sometimes highlight staff productivity.

Intelligent ECM software will perform the functions of standard ECM software but includes additional, powerful features and benefits that further minimize non-taxed transaction audit liability, increase staff productivity and improve the exempt customer purchase experience. Intelligent ECM software maximizes the benefits of automating the Exemption Certificate Lifecycle.

Intelligent ECM software

  • Is a Software as a Service (SaaS) solution — A web-based solution that minimizes installation cost and time since only an Internet connection is needed. Software maintenance is almost never an issue or a cost, since software updates are provided automatically upon logging into the software. Software updates are usually included in the licensing agreement.
  • Automates the process of collecting exemption certificates — Customer records can be automatically imported into ECM software with the system automatically sending certificate requests to customers.
  • Tracks the progress of collecting certificates — Provides notifications when your customers have taken action on a certificate request and sent back a completed certificate.
  • Helps to ensure the completeness of certificates — Provides a mechanism to help ensure customers have filled in all required fields on the correct form and have sent the form back to the system.
  • Eliminates lost certificates — Allows certificates to be signed electronically and instantly captured in the system. Web-based solution enables centralized, digital storage of certificates.
  • Tracks certificate expirations — Provides automatic determination of form expiration based on rules for each form. The expiration function enables certificate renewal requests to be sent for certificates before or after certificates expire.
  • Provides ability to review certificates — There are cases when certificates sent by customers are not valid. A review function enables these certificates to be marked as invalid and initiate a request sent to the customer for correction.
  • Automates the collection of certificates that have expired or been marked as invalid — Provides ability to send electronic renewal requests for existing certificates that are about to expire, have expired or been marked as invalid.
  • Provides auditor tools — Enables fast access and viewing of requested certificates to auditors.
  • Supports customer bill-to/ship-to and job hierarchies — Often times a single certificate will apply to many company ship-to locations. Intelligent ECMs provide support for these types of complex customer relationship hierarchies.
  • Integrates with ERP and tax decision software — Automates the export of certificate data to tax decision software and the import of customer records from ERP software. This trilateral process (the Exemption Certificate Lifecycle) ensures customers have valid certificates and sales tax is billed only when required.
  • Increases staff productivity — Gone are the days of Excel spreadsheets and mail merges. Intelligent ECM software automates and streamlines most of the manual processes commonly associated with collecting and managing certificates.
  • Supports all sales channels — Has the capability to lookup and collect certificates and share certificate data in real-time for direct, retail, ecommerce and tele-sales sales channels.
  • Improves the exempt customer experience — The automation of certificate workflow and the Exemption Certificate Lifecycle enable non-taxed orders to be processed quickly. Built-in certificate best practices eliminate the need for credit, sales or other departments to have exemption certificate expertise when looking up or collecting certificates.

At a minimum, ECM software should provide your company an easy way to locate and collect exemption certificates from your customers. However, using the increased leverage provided by intelligent ECM software, your company can really begin to harness technology to automate the Exemption Certificate Lifecycle to eliminate non-taxed transaction audit risk, increase staff productivity and improve the exempt customer experience.

2. Tax Decision Software

It is beyond the scope of this white paper to go into the detailed functions of tax decision software. Instead, this paper will provide a brief overview of tax decision software and why it is critical to receiving the maximum benefits from automating the Exemption Certificate Lifecycle.

In general, tax decision software determines the taxability and tax rate of a transaction based upon several factors in the transaction. Some of these factors include:

  • the purchase order;
  • information about the product being sold;
  • the location of the purchaser and seller; and
  • any other factors that affect the taxability of the transaction.

Taxability and audits — Once taxability and the tax rate are determined, this information can be fed into an ERP so an invoice will reflect the correct sales tax amount. Now your business can rest assure that the customer has been billed the correct sales tax amount and if audited, the auditor will simply throw up his hands and walk away unable to find any errors. Right?

In theory, this sounds great, but in practice, it is missing one critical piece to ensure that the auditor is duly satisfied. How do we know that the correct tax decision was made by the tax decision software? Most of this determination is based upon information loaded into the software. If this information is faulty, then the tax determination could be faulty as well, and the auditor will have a reason to make an assessment.

Correct tax determination and exemption certificates — One critical piece of information that will help ensure the tax determination is correct comes from customers’ exemption certificates. For example, if there were an expired certificate on file for a customer, but this critical information did not get into the tax decision software in a timely manner, guess what? The tax decision software will assume the customer is exempt from sales tax and no sales tax will be billed. Now, when the auditor looks at this transaction, he is going to discover the certificate was expired and that you improperly did not collect sales tax on the transaction. This will lead to an assessment and this single error could be extrapolated into a large assessment.

Integrating tax decision software and ECM prevents errors—Integrating tax decision software with intelligent ECM software prevents this type of error and other costly errors. Intelligent ECM software can be setup to automatically export certificate data into tax decision software at regular intervals, or on-demand as transactions are processed. In the above example, the tax decision software would have known the customer had an expired certificate on record and tax information would have been correctly transferred to the billing software.

In addition to ECM and tax decision software, ERP/billing software is needed to apply the correct tax based on tax decision and ECM information.

3. ERP/Billing Software

As with tax decision software, it is beyond the scope of this white paper to go into the complex details of ERP/billing software. Instead, it will explain why ERP/billing software makes up the last critical piece for automating the Exemption Certificate Lifecycle.

Typically, ERP/billing software is where most businesses store information about their customers. This information can be billing and shipping addresses, contacts, purchase history, open orders and more. When businesses acquire new customers or changes to existing customers need to be made, those changes are entered into this software. New customers and changes to existing customers are critical data pieces in ensuring the Exemption Certificate Lifecycle is operating at maximum accuracy. Some large, common ERP software makers are Intuit, Sage, Microsoft, Intacct, Oracle and SAP.

For new exempt customers, you need to collect valid certificates as quickly as possible to ensure they are billed correctly and to speed the release of orders. Intelligent ECM software automatically imports customer records and sends certificate requests to these new customers ensuring up-to-date information on customers is available to the ECM software for sending renewals and managing certificate information.

Benefits of Automating the Exemption Certificate Lifecycle

  • Reduces Non-Taxed Audit Liability — Ensures exempt transactions are only processed if valid certificates are on file and enables you to prove it to an auditor.
  • Decreases Billing Errors — Tax decision software will know automatically which customers are exempt from sales tax and the ERP will bill the correct sales tax amount thereby reducing tax-only credit memos.
  • Automates and Accelerates Certificate Collection — Certificate requests for new customers and renewal requests for expired or invalid certificates can be automatically sent electronically.
  • Improves Collection of Valid Certificates — Intelligent ECM helps to ensure valid certificates are submitted by exempt customers.
  • Increases Productivity and Efficiency — Eliminates paper, manual processes, sales tax refunds and short-pays. Intelligent ECM eliminates the need for certificate expertise in your credit and sales staff because it provides built-in best practices.
  • Supports Exempt Transactions in Shopping Carts and POS Systems.
  • Intelligent ECM software can often support the real-time lookup and collection of certificate in e-commerce applications and directly from POS systems and then automatically transfer the certificate data to the tax decision software to make a tax decision — all without disrupting the purchase process.
  • Improves Management and Oversight of Billing Process — Connectivity of the three systems improves visibility of the billing process and ensures policy changes are data and reducing data entry errors.
  • Eliminates Manual Entry of Customer Data — When new customers are added, or existing customer data is changed in the ERP system, this customer data is automatically transferred to the ECM, eliminating the need to maintain this information in two places.
  • Displays Certificate Information for a Customer Inside the ERP — Some ERP software have the ability to retrieve certificate information from ECM software and display a list of certificates a customer has on file, the certificate images and the status of certificate requests, all inside the ERP, eliminating the need to go to the ECM software to view this information.


Every department in every company is asked for ways to contribute to cost savings or productivity. Today, these calls are especially loud for any company dealing with tax exempt customers. In the current tough economic environment where state tax revenues are plummeting, while demand for public services is rising, most states are aggressively stepping up efforts to collect revenue and close these deficits. One method states are using to increase revenues is to be much more aggressive with sales tax audits.

Proactive businesses are successfully meeting this challenge by providing their departments the tools necessary to dramatically reduce their sales tax liability and, in the process, significantly increase staff productivity.

These astute businesses have minimized their business’ sales tax liability because they have implemented Exemption Certificate Management (ECM) software to automate certificate collection and improve the validity of certificates submitted by customers. Furthermore, they have gone a step further to inoculate themselves against sales tax assessments by integrating ECM software with their enterprise resource planning (ERP) or billing software and their tax decision software to automate the Exemption Certificate Lifecycle.

The automation of the Exemption Certificate Lifecycle provides a number of key benefits:

  • Increased speed and automation of certificate collection.
  • Improved validity of certificates submitted by customers.
  • Decreased non-taxed transaction billing errors.
  • Reduced non-taxed transaction audit risk.
  • Reduced staff time and effort in preparing for and managing auditor requests.
  • Increased staff productivity by automating manual certificate processes.
  • Improved exempt customer purchase experience.
  • Elimination of manual entry of certificate data into tax decision software and customer data into ECM software.

To fully reap the benefits of the Exemption Certificate Lifecycle, businesses need ECM software capable of doing the job. AvaTax Certs is the only intelligent ECM software that fits this role. As the most powerful and capable ECM software available, AvaTax Certs fully enables all the benefits of automating the Exemption Certificate Lifecycle.

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