Evaluate Your Sales Tax Exemption Certificate Management Process

Charles Maniace
August 29, 2018

Business Repercussions in the Wake of the Supreme Court Decision on South Dakota v. Wayfair

In the weeks since the South Dakota v. Wayfair Supreme Court decision, many tax professionals and experts have written about how organizations need to start planning and preparing for expanded sales tax determination, collection, and reporting responsibilities. Some have even written about addressing expanded filing requirements, but sales tax exemption certificate management has received little to no attention until now.

Before jumping into certificate management, let’s examine what a company needs for accurate sales tax compliance. To truly get things right and avoid audit exposure, organizations need to:

  1. Make a correct tax calculation at the time of sale – at a minimum, this requires knowing the correct taxing location, the appropriate rate for that location, and any special product taxability rules.
  2. Report the transaction on the right line of the tax return and complete your filing on-time – to do this you must understand which form you are required to file, the applicable filing frequency, and any obligation you may have to make prepayments.
  3. Maintain proper documentation that substantiates sales to exempt entities or sales for an exempt use – proper compliance here means that you need to understand your required level of due diligence in accepting a customer exemption certificate, whether particular types of exemption documentation are valid for a given state, and certificate expiration rules.

Even before Wayfair, certificate management was no easy feat. According to Aberdeen Research, collecting exemption certificates, validating them, and keeping them up-to-date is one of the top time consuming and costly challenges for businesses:

exemption certificate management top business drain

Do You Have All Necessary Sales Tax Exemption Certificates?

Since the SD v. Wayfair decision, no fewer than 13 states have moved to enact economic nexus rules that have clear and specific start dates, beginning as far back as July 1 and extending through January 1, 2019. As state legislatures reconvene after the summer recess, this number is sure to rise.

While no two rules are exactly alike, most states have the following two common standards:

  • The total dollar value of sales to in-state customers and
  • The total number sales into a given state.

However, not every state is particularly clear on how to determine either figure. For example, should sales to exempt entities or sales for an exempt purpose (e.g. resale transactions) count towards these totals?

Regardless, expanded nexus means expanded exemption certificate management requirements because once you cross either standard, the burdens you face as an economic nexus taxpayer will largely be the same as if you have traditional physical nexus. This translates into if you are audited by a state, the Department of Revenue will subject you to the same scrutiny as any other taxpayer, and you must properly document an exempt sale.

Failing to affirmatively approve the propriety of an exemption will result in an assessment. In fact, scrutiny could be even tighter in a post-Wayfair world as states begin to embrace technology and automation as part of their audit process or if they opt to employ contract auditors who may offer little to no leniency.

This means for any new state where you are now collecting, remitting, and reporting sales tax you will need to:

  • Understand what exemption types are valid under each state’s law
  • Understand what exemption forms are appropriate
  • Obtain valid exemption certificates from your existing exempt customers
  • Create a process that ensures certificates are obtained going forward with new exempt customers at the time of sale
  • React to certificate expirations and define procedures where expired certificates are either properly replaced with fresh certificates or tax begins to be charged on the customer’s invoice
  • Define a process that allows you to safely store and readily access certificates if audited

Improving Your Exemption Certificate Process 

The time is now to consider your exemption certificate management process. Do you have a plan that will keep your company compliant in the face of a vastly expanded virtual nexus footprint? Do you have a solution that enables frictionless commerce? Or will your company be exposed to expanded audit risk and liability?

All is not lost – companies can reduce risk by ensuring all the items on the above checklist are addressed. This can be accomplished by adopting an integrated solution capable of:

  1. Calculating and determining tax appropriately across the country.
  2. Reporting your taxed and exempt transactions on the right return and getting your return to the taxing authority on-time.
  3. Ensuring your exemption certificates are valid, up-to-date and readily accessible.

Take Action

Learn how Sovos CertManager, backed by the Intelligent Compliance Cloud, reduces burdens and safeguards businesses from risk and penalty exposure by automating both tax exemption certificate management and real-time verification. Get a preview, below.

Author
Charles Maniace
Charles Maniace is the Director of Regulatory Analysis at Sovos. An attorney by trade, Chuck leads a team of attorneys responsible for all the tax and regulatory content that keeps Sovos clients continually compliant. Over his 14 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a B.S. in Business Economics from Bentley College, a J.D. from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.

Relevant Posts

New York Implements Economic Nexus by Resuscitating 1980’s Law

When New York first passed its law defining what constitutes a “vendor” subject to collecting sales tax in the 1980’s, the idea of online shopping sounded like science fiction. In retrospect, NY may have effectively enacted the first “economic nexus” law when they drafted their definition of “vendor” to include a person who regularly or […]

Read More
IRS Uses Unprecedented Methods to Enforce ACA Reporting Penalties

With recent enforcement measures, the IRS has offered definitive proof that the Affordable Care Act (ACA) is still alive and that the agency plans to strictly enforce ACA reporting. Last spring, the agency issued Letter 226J to Applicable Large Employers (ALEs) that failed to cover 95 percent of employees. ALEs are companies with 50 or […]

Read More
Government Shutdown Will Not Move IRS 1099 Reporting Deadlines

UPDATE (Jan. 8): Reporting season is moving forward according to plan. The IRS has announced that it will process tax returns on schedule and without delays. While the agency will clarify its contingency plan in the coming days, organizations should proceed as planned with 1099 reporting and other seasonal filings. The IRS will recall a […]

Read More
4 Big Post-Wayfair State Sales Tax Developments to Watch 2019

The South Dakota v. Wayfair decision last June has created a lot of angst for indirect tax professionals and the businesses they work so hard to protect from the burdens of sales and use tax filing. Six months later as we begin the new year, that angst has not gotten any lighter. Any federal legislative […]

Read More
The 5 Biggest Stories in Indirect Tax Compliance 2018

2018 was a volatile year in indirect tax compliance for tax, finance and IT professionals worldwide. With an increase in globalization and tax gaps surpassing tens of billions in some countries, it’s not surprising that one of the biggest challenges governments are addressing is revenue collection. Like enterprises, governments are creating new, technology-driven processes to […]

Read More