Exemption Certificate Best Practices
Benefits, Risks, & How To Do It Right
© Avalara
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Agenda
1. Overview of Exemption Certificates
• Collection
• Validation
• Storage
2. Exemptions & Customer Service
3. Avalara CertExpress
4. Questions & Contacts
© Avalara
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Disclaimer:
The content provided in this presentation does not constitute sales and use tax,
legal, or any other type of advice. You should always consult with a CPA, tax
adviser, or an attorney before acting upon this information. We make no warranties,
representations, or claims of any kind concerning the information presented in this
presentation.
If you would like us to review and provide advice on your particular situations,
please contact CDM@Avalara.com
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Overview of Exemption Certificates
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Overview of Exemption Certificates?
What are exemption certificates?
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A form signed by a purchaser or purchaser's
representative certifying that the items or services
purchased will be used in a manner or for a
purpose that qualifies the item or service for
exemption from sales tax.
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Sales tax exemption certificates enable a
purchaser to make tax-free purchases that would
normally be subject to sales tax.
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The purchaser fills out the certificate and gives it
to the seller. The seller keeps the certificate and
may then sell property or services to the
purchaser without charging sales tax.
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Overview of Exemption Certificates?
Why do we need exemption certificates?
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Legislature decides what the tax base is – what is taxable and what is not
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Legislature also allows for exceptions to otherwise taxable items
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Product based –food (but not candy), Rx & services
Use based – RESALE, manufacturing/production, R&D, teleproduction, interstate commerce,
pollution control, agriculture, packing materials
Entity based – gov (federal, state, local), tribal gov, non-profit, church, hospital
Miscellaneous
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Direct Pay Permits
Enterprise zones
Boll weevil lumber products (very, very obscure)
Documentation of sale details - Bill of Lading, Purchase Order, etc
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Overview of Exemption Certificates?
State by state considerations:
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NO universal rules on taxability or exemptions
Each state decides
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What is taxable
What exemptions to allow
How they define those exemptions
How to document the exemptions
For instance –
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About half the states require non-profits to pay sales tax
Several states require state/local government entities to pay sales tax (CA, WA, AZ, etc)
Definition of manufacturing varies widely from state to state
• Some include inventory control such as forklifts or conveyor systems, some do not
• Some include repair parts to manufacturing equipment, other only include the initial
purchase of equipment
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Overview of Exemption Certificates?
Financial impact on your business:
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Sales and use tax audits
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Disallowed exempt sales are a leading cause of audit assessments
Often comprise a third of audit liabilities
Errors can be extrapolated across a sample
Decelerates revenue
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New Customers can’t be set up timely
Orders on hold awaiting exempt certs
Clients don’t pay invoices if tax incorrectly
Want credit/rebill in order to pay
Short Pay
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Overview of Exemption Certificates?
Financial impact on your business:
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Customer Service
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Cross Departmental Inefficiencies
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Customer field frantic calls for certificates under audit
Customer is billed incorrectly
Customer gets redundant requests for documents
Short pays for tax must be resolved
Tax only credits or checks issued
Certificates are not easily accessed by multiple departments
Compiling certificates in audit is messy and unorganized across multiple teams
Compliance other than state tax audits
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Difficult to comply with SOX
Internal audits time consuming
Reserves for audit liabilities
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Overview of Exemption Certificates?
Who is responsible for collecting them?
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No one, yet everyone
Typically there is no single owner of the process
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Overview of Exemption Certificates?
Who is responsible for collecting them?
Tax/audit burden
Customer Service burden
Administrative burden
Source: CRF “Sales Tax Exemption Certificate Follow-Up” 2006
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Exemption Certificate Collection
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Exemption Certificate Collection
Scaling between individual and bulk requests:
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Individual requests
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New customers
New shipping locations for existing customers
Large collection campaign
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Upcoming or current audit
State requirements change
• WA & LA in 2009 for resale
• TX in 2012 & GA in 2013 for agricultural
Your company dynamics change
• You acquired a company
• You were acquired
• Legal name or status change
• Newly established nexus
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Exemption Certificate Collection
Hidden struggles when collecting exemption certificates:
• Customers – who and where
• Kick off Communication
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Undeliverable - resend another method or remove from list (i.e. taxable)
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Returned mail
Fax failed to go through
Bounced email
Track Responses
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Phone campaign
Letter mass mailing
Fax blast
Email campaign
Certificates received
Field questions – invoice #, dates, products, etc
Response of taxable
No response
Send Escalating Reminders
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Exemption Certificate Collection
Available methods & tools:
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Manual (primary method)
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Technology – Web-based Software as a Service
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Mail merge and spreadsheet tracking
Certificates are rarely accessible
Invalid certificates often submitted
Internal controls lacking, time – consuming
Workflow improvements can reduce staffing requirements by >80%
Reduces skill set necessary by employees
Increases compliance level significantly
Instant accessibility across enterprise
Outsource
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Requires a fully defined process
Can remove the labor burden
Can remove the knowledge burden
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Exemption Certificate Validation
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Exemption Certificate Validation
Minimum Legal Components:
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Name of the buyer AND seller
Buyer’s permit number (or explanation why number not needed)
Description of the property being purchased
Nature of the business
Signature
Date
Note: Be wary of company developed
“Catch-All” certificates. You don’t want to go
through the work of collecting certificates
only to have an auditor throw out homemade
versions due to the wrong questions/data
points.
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Avalara CertExpress
Validation criteria:
81%
Fully completed
71%
State sales tax ID#
65%
State required form
51%
Signature
47%
Data
35%
Good faith logic
Other
0%
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1%
10%
20%
30%
40%
50%
60%
70%
80%
90%
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Exemption Certificate Validation
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Exemption Certificate Validation
Good faith:
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In order to satisfy Good Faith, sellers must perform sufficient due diligence
that it pass the “smell test” or reasonable “gut check”.
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In order to do this, sellers are required to have a familiarity with:
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In addition to basic items in last slide, includes:
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exemptions available in nexus states
exemptions available that can be reasonably performed with type of property sold
customer business types
Type of exemption claimed
Correct form
Completely filled out
Name on certificate matches name on customer account
Hidden Danger - Method of payment for government or exempt organizations
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Exemption Certificate Storage
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Exemption Certificate Storage
Centralized versus de-centralize
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Best practice to centralize: reduces multiple requests to the same customer, duplicate
efforts by different departments, and enables better training opportunities for employees
Minimum: customer name, account number and state
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Best practice is the minimum plus issue date, expiration date, and form name or
exemption type
Keep even obviously flawed certificates
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Something is better than nothing
When you receive updated certificates
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Keep the older ones for historical data needed to back up previous transactions in
audits
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Exemption Certificate Storage
Ongoing maintenance:
• Expirations
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1-10 years depending on the state and type of exemption
Have a method to check for an existing certificate to override an expired one to avoid
“pestering” a proactive customer.
Best practice: self-imposed expirations when one does not apply to statute
• Ongoing customer expansion that might create new tax liabilities
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New branch/locations of existing customers
Drop ship products directly to end user
• Expansion of your company
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Creates nexus in new jurisdictions
M&A activity may require new certificates issued to/from new name
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Exemption Certificate Storage
Purchased tools:
• Existing company processes or applications
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Check with marketing or accounting for fax blasts or CRM
• Exemption Certificate Management Software
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Specialized software (Saas) to manage:
Customer communication
Missing, incomplete, expired documents
Tax changes and documentation requirements
Integration to tax/billing system
Visibility into compliance and potential liability
AvaTax Certs (www.avalara.com) and www.CertCapture.com for example
• Certificate Management Software AND Outsourcing
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Outsourcer can do heavy lifting of clean up and software to keep ongoing compliance
Do not recommend having outsourcer or consultant alone – one time clean ups rarely work as a
solution is not put in place for ongoing compliance
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Exemption Certificate Storage
Free tools:
• CertExpress – free online certificate creation wizard
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www.certexpress.com
• Validity checklist, white papers from Avalara
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http://www.avalara.com/resources/whitepapers
http://www.taxrates.com/
• Sales Tax Blog including certificate topics
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http://www.taxrates.com/blog/
http://www.salestaxsupport.com/blogs/sales-use-tax/category/sales-tax-exemption-certificate/
• Sales Tax Webinars – nexus, certificates, audits, etc
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http://www.avalara.com/resources/webinars
http://www.avalara.com/resources/thought-leaders
• State Department of Revenue Websites
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Exemptions & Customer Service
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Exemptions & Customer Service
• Charge tax even though customer submitted a certificate
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Customer short pays invoice
Customer does not pay invoice at all until resolved (often with government accounts)
Customer pays tax then wants refund
• Do not tax even though no certificate is submitted
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Questioned in audit so go frantically go back to customer
Bill tax after the fact
• White paper available
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http://www.avalara.com/resources/whitepapers/customer-service-and-ecm
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Exemptions & Customer Service
• Risk mitigation in audits
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Ongoing exposure is reduced
Existing exposure is understood and can be planned around
• Efficient use of internal resources
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Less repetitive handling of same documents/processes
Reduce additional process caused by mistakes
Less energy used to prepare for and manage audits
• Improved customer relationships
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Proactive in dealing with taxability issues
Ability to quickly know situation and take corrective action if necessary
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Exemptions & Customer Service
• Focus on benefits just mentioned
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Map “life of an exemption certificate” company-wide
Identify stakeholders and involve other departments!
• Use concrete examples
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Specific customers who were frustrated (do you know the percentage of customer base exempt
to project satisfaction?)
Potential liability analysis with $ associated
Audit papers citing issues
Number of tax refunds with corresponding dollars and FTE
Number of orders on hold awaiting tax resolution
• If public company, cite Reserve requirements that can be eased (i.e. more
available cash)
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Exemptions & Customer Service
Automating using intelligent exemption certificate software
enables you to:
• Increase speed and ease of certificate collection.
• Improve validity of certificates submitted by customers.
• Decrease billing errors for non-taxed transactions due to ERP and tax decisio
software having accurate information of which customers are sales taxexempt.
• Reduce non-taxed audit risk. Auditors end up finding very little to assess
against.
• Raise staff productivity by automating manual certificate processes.
• Improve exempt customer purchase experience.
• Eliminate manual entry of certificate data into the tax decision software and
the customer data into CertCapture.
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Avalara CertExpress
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Avalara CertExpress
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Exemption Certificate Collection
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Avalara CertExpress
Billing Integration:
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Track which customers have provided exemption certificates on a state or jurisdictional
level
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Billing system should revert exempt flag upon expiration unless receive new certificate
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Update billing system with valid certificate data to accurately and timely reflect new
certificates received
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White papers available
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http://www.avalara.com/resources/whitepapers/automating-the-exemption-certificate-lifecycle
http://www.avalara.com/resources/whitepapers/avatax-certs-and-automation
“We don’t have to issue credits to customers that we incorrectly charged for tax
because we were unaware they were exempt. This makes everyone happier.
Relationship management is less complex, and there is less rework. It is easier to
extend credit and do billing.”
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Questions & Contacts
Matt Patrick
Regional Sales Manager
Avalara
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