Evaluate Your Sales Tax Exemption Certificate Management Process

Charles Maniace
August 29, 2018

This blog was last updated on March 11, 2019

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.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Charles Maniace

Chuck is Vice President –Regulatory Analysis & Design at Sovos, a global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, he leads a team of attorneys and tax professionals that provide the tax and regulatory content that keeps Sovos customers continually compliant. Over his 20-year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC, Bloomberg and more. Chuck has also been named to the Accounting Today list of Top 100 Most Influential People four times.
Share this post

dtc spirits new york
North America ShipCompliant
February 14, 2025
A New Era for DtC Spirits Shipping: How New York’s Market is Taking Shape

This blog was last updated on February 14, 2025 In the fall of 2024, New York became the latest state to open its doors to direct-to-consumer (DtC) spirits shipping, marking a significant milestone for the industry. As one of the most populous states with a thriving market for craft and high-end spirits, the shift was […]

North America Unclaimed Property
February 10, 2025
Delaware Announces 2025 VDA Invitation Dates

This blog was last updated on February 14, 2025 Mark your calendars – April 11, 2025 and August 15, 2025 are this year’s anticipated release dates for the Delaware’s Secretary of State (SOS) VDA program invitations. In the event that an organization receives an invitation to participate in the Voluntary Disclosure Agreement (VDA) program  , […]

North America Sales & Use Tax
February 6, 2025
The Tariff and Sales Tax Mishmash – Untying the Mess

This blog was last updated on February 14, 2025 Talk of tariffs dominates the current news cycle with some commentators suggesting that tariffs will spell disaster for our economy while others say the exact opposite. We’ve seen the stock market sometimes fluctuate as tariffs are announced but later suspended, leaving us to wonder whether an […]

retailer dtc wine shipping
North America ShipCompliant
February 6, 2025
Retailer DtC Wine Shipping: The Time Has Come

This blog was last updated on February 14, 2025 By Tom Wark, Executive Director, National Association of Wine Retailers We are often reminded by the media and those in the wine industry—as well as by wine enthusiasts—that the three-tier system of alcohol distribution in most states hinders consumer access to the expansive number of wines […]

Montana 1099-DA
North America Tax Information Reporting
February 5, 2025
State Filing Alert: Montana’s New 1099-DA Requirements for Crypto Brokers

This blog was last updated on February 5, 2025 Reporting digital asset transactions on Form 1099-DA just got a little more complicated. For 2025 transactions, crypto brokers that file Form 1099-DA with the IRS will be required to file the 1099-DA with the State of Montana. This makes Montana the first state to introduce a […]