Exemption certificate management and audits

Maintaining current, valid exemption certificates is critical in managing your overall sales tax risk. Under audit, an otherwise exempt sale will be deemed taxable without such documentation from a customer – and just a few missing certificates can result in large penalties and interest.

Properly documenting exempt sales is a hassle and a pain, but it matters. In this blog based on one of our recent webinars, here are how states and other tax jurisdictions are getting tougher with their exemption certificate audits.

Matters of fact

The acceptance of sales and use tax exemption certificates mostly rely on just facts: You either have an appropriate certificate for the sales tax exemption that meets all requirements of the taxing jurisdiction, or you don’t. If you have good facts regarding your certificates, you have a great case in the event of an audit. If you don’t, you could be in great trouble.

Facts to consider:

• Is an exemption certificate on file?
• Is it the appropriate certificate for the exemption claimed? (Is the transaction a sale for resale, is the customer claiming a manufacturing exemption, is the customer a tax exempt entity, etc.)
• Is the certificate missing a signature, date, or other required field?
• Is the certificate expired?

Ensure that all your exemption certificates are easily produced upon audit and proactively review all your certificates for completeness and validity.

Less than proactive

We’ve seen that clients are less than proactive in managing exemption certificates, getting into an audit and then scrambling to obtain certificates for prior periods. What are the risks of this?

Many states require that the exemption documentation be acquired contemporaneously or prior to the sale. Most states have permitted taxpayers even when under audit to go back and acquire certificates – but are scaling back on this opportunity.

Retrieving certificates from past customers can be problematic no matter how much time you have. When you make a sale, you can immediately track down that customer. But as time goes on, those customers may go out of business and their contact information may grow stale. Given the pressures of an audit and the potential erosion of your customer contact information, it’s best to be proactive in securing customers’ exemption certificates.

You never know when an audit notice will arrive at your doorstep (or more likely, your inbox), it’s always best to assume you will be audited and ensure you either have the capital to cover any non-compliance or have your data, reporting and certificates in order so an audit is less likely to show any areas of noncompliance.

Learn more about managing exemption certificates in our “Expert View webinar: Exemption Certificates Management, Audits, and more!” webinar with CERTifyTax founder and CEO Tom McCarthy and COO Ray Diaz as they discuss best practices in exemption certificate management.

And now, with CERTifyTax, TaxConnex has a managed exemption certificate service offering. Just like our hands-on approach to the rest of your compliance process, we will now apply that to your exemption certificate management as well. Learn more and get in touch if you’d like to talk about how we can make sales tax less daunting. business could be impacted by exemption certificates and to gain a better understanding of your burden of sales tax compliance.

To learn more about being prepped in case of an audit – catch our recent webinar: Strategies to Managing a Sales Tax Audit.