Sales Tax Automation 201: Exemption Certificates

Chapter 2: The Exemption Certificate Life Cycle

Sales tax is a complicated world. We’ve put together this series to give you the information you need to navigate the complexities of compliance, as well as the solutions offered through sales tax technology. In this chapter, we outline the steps of the sales tax exemption certificate process.

Understanding the exemption certificate life cycle

The exemption certificate life cycle starts with certificate collection, and continues with use in transactions and audits to renewal when a certificate expires or is otherwise classified as invalid.

Exemption certificate management (ECM) software, enterprise resource planning (ERP) or billing software, and tax decision software are critical pieces of software during the life cycle. They can minimize audit exposure, increase staff productivity, and improve the exempt customer purchase experience. We cover these in more detail in Chapter 3 of this series.

The exemption certificate life cycle consists of three primary steps initiated by a sale and certificate request. The cycle continues for the duration of the business relationship.

Step 1: The seller collects the certificate from the customer

When a customer makes a sales tax-exempt purchase, the seller retains a copy of an exemption certificate on file. The certificate has to be valid at the time of purchase, and the burden falls on the seller to ensure it is. Challenges arise when either the customer or seller isn’t familiar with the documentation required. In addition, a cumbersome documentation process on the seller’s end can result in a poor customer purchase experience.

Step 2: The seller maintains a file of collected certificates

This step can look widely different from one business to another. Some businesses manage exemptions certificates with an actual binder in a filing cabinet. For smaller businesses with a few customers, this can be perfectly adequate. For anything more complex, a digital system is in order. Taking it a step further, some companies choose to automate certificate management end to end.

With an automated solution, customer data is passed to ECM software and requests for certificates are automatically sent to customers. ECM software serves as the “source of truth” for certificate management, because it tracks certificate expirations and identifies certificates that have been deemed invalid.

Intelligent ECM software tracks the status of requests and helps ensure customers provide only valid certificate information for their transactions. It can also retrieve and provide copies of certificates to auditors.


Step 3: Tax decision software steps in

ERP software interacts with tax decision software to apply the correct tax amount, if any, to invoices for customers. When certificate management is automated, the platforms communicate in the background, at the point of purchase.

If a business manages certificates manually, it has to ensure the tax decision software has accurate certificate data. If the data is up to date, sales tax-exempt customers will be billed correctly. If not, customers will be billed incorrectly and the seller increases audit exposure and risk.

Document compliance automation

Collect and manage exemption certificates with far less effort. 

Next steps

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Sales Tax Automation 201