Posted on October 26, 2020
The COVID-19 pandemic has been and will be remembered as one of the most impactful global events of our era. An unprecedented challenge was thrust upon the medical, government, and business community that will clearly change many of the behaviors of our society in the long run.
As businesses worked quickly to adapt, one of the last issues many of them considered was compliance with state and local sales tax.
In Part’s 1 and 2, we talked about how remote employees and increased remote sales contribute to a larger sales tax nexus footprint, obligating more business to collect and remit sales tax. In Part 3, we talk about one of the most common sales tax compliance missteps that occur once a business has begun collecting sales tax.
Mistake #3 – If you aren’t collecting and verifying exemption certificates, then you will pay tax on your exempt sales
The general rule is all tangible personal property is subject to sales tax unless specifically exempt, and all services are non-taxable unless specifically listed as taxable under state and local law. As always in state tax, exceptions and differences apply, but note if your customer claims they are exempt from tax due to their industry, status, or activities, documentation proving this must generally be provided to you. This documentation is known as an “exemption certificate”, the most commonly encountered of which is the “resale certificate”. All taxable sales under state law will maintain their status as taxable unless you can provide an auditor with one of these certificates.
It is not just about collecting certificates; more businesses of scale do that than not – it’s about validating certificates to ensure at the time of audit they will hold water and as well as reliably storing them for retrieval when requested years later. This is typically where we as sales tax professionals see the most dramatic differences in audit results between processes outsourced to professionals and those managed in-house. Now, it is not uncommon for auditors to allow taxpayers to collect current exemption certificates at a time of audit to apply to sales going back years prior, which means that lacking a process does not always equate to liabilities under audit. However, trying to conduct exemption certificate management (ECM) retroactively is stressful, harder to encourage participation from customers, and in unfortunate cases not an option at all.
Take a recent situation we saw as an example. We had a client come to us to assist with a sales tax audit who was completely managing certificates in house. When evaluating their ECM, we found a significant certificate gap from a “former” customer of theirs who they had exempted from thousands of dollars in tax.
There were two issues with the certificate. First, the certificate was made out to the client’s former name and state tax account number. Years prior, they had gone through an organizational change, and while most certificates were updated, this old one was not corrected.
Second, the client’s customer had been purchased by another entity and fully absorbed, therefore they no longer existed. It would be impossible to collect a certificate from that customer – there was no one to contact!
This certificate was issued to a different company, before the current client existed, by a customer that is no longer in business. It is impossible to replace this certificate in a way that covers the audited transactions and requires a bread crumb trail to line this exemption up the said transactions. It certainly does not meet the legal requirements of a valid exemption certificate. Negotiations with the auditor is the only method of relief now, and beyond that, attempts through the court system.
It is the unfortunate reality of difficult economic times that your customers may go out of business or otherwise cease to operate as the entity they formerly were. If you aren’t being proactive at the time of sale, you are setting yourself up for significant tax cost. As I said earlier in this article, does your business have the margins to take an up to 9.5% hit on your “exempt” sales?
Tips for the Taxpayer
Immediately add to your accounts receivable process the collection of exemption certificates from all customers to which you make taxable sales or potentially taxable sales and they are claiming exemption. This should include states where you both are and are not registered (worst case scenario you are overprepared, and the additional administrative burden is relatively low if implemented correctly).
Evaluate the gaps you have currently by validating all current certificates and requesting new ones where insufficient or missing entirely. Begin charging tax on taxable sales where you are unsuccessful in obtaining a valid certificate from the customer and you are registered with the state to collect tax. Assess the possible need to charge tax on prior transactions you do not have a valid certificate for.
There are four standard approaches to ECM: 1) In-house manual management (not recommended), 2) outsource to a tax consultant for manual management (not recommended) 2) In-house management using ECM technology solutions (minimum recommended) 3) Outsource to a tax consultant who leverages ECM technology (recommended). When outsourcing, evaluate – is the vendor a tax expert who leverages tax technology, or, a technology firm first and tax services company second? Focus matters. Remember collection is rarely the main issue, validation is.
How Can We Help?
Allyn International has been helping businesses with their tax issues for over 25 years and is led by experienced professionals whose sales tax knowledge goes well beyond that. Allyn regularly conducts nexus reviews as a part of our end-to-end sales tax compliance services or as one-off consulting projects. When we say end-to-end services, we mean we will work with your data in its least prepared form and take actions far beyond the point of our competitors. Our mission statement calls for us to enable you to succeed by allowing you to focus on your core business. With Allyn on your side, you will not have sales tax lingering in the back of your mind. We have been providing that peace of mind in all aspects of Federal, state, and local tax compliance and consulting for large US and global corporations since our inception.
Allyn is also happy to announce this year we upgraded our existing ECM software solution and are introducing CERTlocker, the ECM software for professionals by professionals. While we recommend you engage us to apply our end-to-end incomparable ECM services to your operations while we leverage the technology, CERTlocker is available for licensing as well.
At Allyn we have seen significant success in defending exempt sales for our clients under audit when we have been managing their exemption certificates for years prior. This allows Allyn to focus our energies to further audit savings opportunities at a lower total cost of compliance to the taxpayer.
Trust that with Allyn on your side you will pay your fair share in taxes but not a penny more. Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: email@example.com.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.
Contributor: Jordan Perri
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia and Allyn regional headquarters are strategically located in Fort Myers FL USA, Shanghai P.R. CHINA and Prague, CZECH REPUBLIC. For more information, log on to www.allynintl.com.