Posted on July 08, 2020
On June 21, 2018, the US Supreme Court provided a landmark decision that changed the dynamic of sales tax and has since created a domino effect on taxpayers and businesses throughout the US. Not only has the definition of nexus expanded from the prior physical nexus to now include economic nexus, factors such as number of transactions and/or dollars of sales for a given time period to customers of a state, but also has the sales tax collection implication grown for existing taxpayers and now potentially new taxpayers not to mention marketplace facilitators.
With such drastic changes to the sales tax landscape, a focused review of a business’ nexus (both physical and economic) is recommended. If a business has nexus (a connection with) a jurisdiction (state or local taxing authority), based on the new levels passing state legislation, then the business should register to collect sales tax in that state where the transaction occurs or is shipped to a customer. With sales tax registration comes added responsibility in the proper charging of sales tax to customers and collection of exemption certificates for those customers who are exempt.
The process of collecting, validating, renewing, maintaining, and storing exemption certificates is commonly known as exemption certificate management (ECM). ECM is critical to the function of the sales tax operation, sales tax compliance, and sales tax audit liability reduction.
As a result of the Wayfair decision and subsequent changes to state requirements, which are still evolving today, sellers may experience a greater need for knowledge and expertise in the sales tax field to become compliant. Certainly, the administrative burden post-Wayfair is evidenced by additional actions required by sellers in the areas of nexus, registrations, tax collection and remittance, ECM, and sales tax audits.
With 45 US states (and the District of Columbia) all having a state-wide sales tax, each of them has the autonomy to enact tax legislation applicable to their state. To be compliant, a business must have sales tax expertise in all states in which they operate or sell, and it must apply such resources to the management of these sales taxes.
Why Obtain Exemption Certificates?
If a business (seller) is registered in a state for sales tax, the seller is required to charge and collect sales tax on all transactions that are taxable unless the purchaser provides a fully executed exemption certificate. Many businesses make purchases with the intent to resell. In such cases, the exemption certificate is also known as a resale certificate. It is critically important to a business to obtain exemption certificates for typically taxable transactions for which tax is not charged due to the customer being exempt.
A taxpayer who has not collected exemption certificates for such exempt transactions may be liable for the sales tax on those transactions under audit by the State Department of Revenue (DOR). State DORs typically audit taxpayers for sales and use tax on a 3-4-year cycle. Imagine the challenges of trying to obtain a valid certificate 3-4 years after a transaction: purchaser is no longer in business, business has changed ownership, or purchaser cannot provide a certificate. A prudent business would want to have a process in place to obtain valid exemption and resale certificates at the time of sale and store these for future audit so the business will not be held liable for the sales tax plus interest over those years.
One of the most common areas with greatest potential sales tax liability under audit is the collection of valid exemption certificates. Allyn has seen businesses without a strong process for collection and validation struggle to produce exemption certificates during a sales tax audit resulting in initial audit liability estimates of nearly $2M in tax for a single state just related to exempt sales. Conversely, Allyn has managed and completed sales tax audits for clients resulting in no ($0) liability on sales thanks to a solid ECM process solution.
With state sales tax rates ranging from 4.44% to 9.55%, can a business afford not to collect valid exemption certificates? Perhaps, this is the most valuable reason to obtain, validate, maintain, and safely store exemption certificates.
Methods of Collecting
While there is no mandated method of collecting exemption certificates, there are some that tend to produce better results. Some businesses continue to use paper certificates stored onsite in files or filing cabinets. These could be stored in a central area or dispersed throughout the country depending on the business’ process. Others utilize electronic media to store and index certificates, whether scanned images stored in a common server or through exemption certificate management (ECM) software.
Benefits of digital storage of exemption certificates include security from physical risk elements, availability, accessibility, paper reduction, storage costs, and centralized location. We have all experienced the sight of paper that has been faded over time or destroyed by water. Other physical factors such as fire and wind may cause paper certificates to be destroyed or irretrievable. An electronic image of a certificate can offer accessibility and availability to many users at any time from any access point in the world. Digitally stored certificates reduce a company’s carbon footprint and reliance on paper documents and their long-term storage. Having a central repository for exemption certificates provides a means of unified collection and retrieval without having to search in many other areas.
Validity Check, Renewal, and Routine
Once an exemption certificate is provided by a purchaser to a seller, the seller should review the certificate for several essential items. Not only checking that the form of the certificate itself is valid for the specified state(s) but also ensuring all required elements are properly completed on the certificate must be an integral part of a compliant taxpayer’s process.
Required Elements of an Exemption Certificate:
While many states’ exemption certificates are valid until revoked and never expire, there are many states that differ. Some states issue exemption certificates that expire after a certain period (1, 3, 4, 5 years, etc.). The State of Florida is an example of one such state that produces exemption certificates annually. While many states provide their own state-specific exemption certificate form, a number allow the purchaser to provide a multijurisdiction certificate which allows the participating states to be listed on one form along with the taxpayer’s registration numbers for those states. There are 38 states who have indicated the Uniform Sales & Use Tax Exemption/Resale Certificate - Multijurisdiction is acceptable, and there are 24 member states currently participating and allowing the Streamlined Sales Tax Agreement Certificate of Exemption, with additional non-member states who may also accept the form.
Streamlined Sales Tax Agreement Certificate of Exemption
Uniform Sales & Use Tax Exemption/Resale Certificate - Multijurisdiction
To maintain valid certificates for exempt transactions and customers, a business must plan to proactively reach out to customers in advance of certificate expiration dates and obtain renewed exemption certificates. Having a process and technology in place to do so will provide another opportunity to reduce potential future tax liabilities.
In addition to collecting valid certificates at the time of sale, another best practice of a tax compliant business is to review customers who are not charged sales tax on a monthly basis and compare this list to valid exemption certificates from your customers. Those that are missing can then be contacted and collected. By staying on top of the process monthly, a taxpayer could prevent sales tax liabilities in the future during audit.
Support for Your Business
Whether you need a helping hand in terms of employee or personnel support in the tax field or if you require tax consulting as a result of COVID-19 impacts, Wayfair, or otherwise, Allyn is here to support your business.
Allyn’s Tax operation has been working diligently serving our clients throughout the global crisis maintaining operations, exceeding expectations, and filing state and local business tax returns far ahead of scheduled original due dates. Allyn Tax is providing compliance throughout the US and Canada as well as tax consulting, audit defense, and exemption certificate management software and services.
Allyn is providing solutions that enable businesses to focus on their core purpose while Allyn manages the tax function. From supporting a select project to ensuring end to end operational support, Allyn Tax will help your business throughout today and beyond. Our goals for your business are that we improve your tax compliance, reduce your costs, and maximize your tax savings.
Allyn can manage the entire ECM process, review certificates, validate as complete and accurate, notify if invalid or incomplete, obtain valid certificates, and store certificates and data electronically in proprietary CERTlocker software. CERTlocker is available and accessible on a secure web portal and offers a range of permission settings allowing specified users access to certificate data, images, and reports. Allyn’s exemption certificate management solution enables clients to efficiently manage certificates. Allyn eliminates time-consuming and labor-intensive tasks, streamlines processes, improves compliance, and reduces audit exposure and tax liabilities.
Tips for the Taxpayer
As a business seeks to avoid significant sales tax audit liabilities and wishes to improve tax compliance, it should focus on these three areas:
The information outlined in this article, Allyn Tax Publications, and Allyn Tax Reference Materials from Allyn’s website will assist your business in obtaining high-level, quick answers regarding state and local taxes. With any charts and quick references, it is extremely important to explore the details associated with each state’s position as compared to your business situation to ensure your business has the tools necessary to file and pay both timely and accurately without incurring penalty or interest.
For specific details, receiving guidance from a tax professional such as Allyn can help ensure your business is sales tax compliant in states and localities and sales tax audit liabilities are minimized due to exemption certificate management.
How Can We Help?
Allyn’s Tax team is staffed with seasoned tax professionals and consultants experienced in all aspects of Federal, multi-state and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.
Allyn manages exemption and resale certificates in every applicable state. Allyn offers web-based software that electronically stores exemption certificates and key certificate data while Allyn’s Tax team reviews certificates for validity and accuracy upon receipt before they are electronically stored for compliance and audit defense. Allyn ensures valid certificates are maintained, renewed, and audit ready.
Allyn files state and local tax returns in every US taxing jurisdiction and manages the process from data acquisition and analysis to return filing and payment of taxes. Allyn provides reviews of business data and processes for tax savings opportunities, compliance, and efficiency offering tax expert advise for your consulting issues.
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: firstname.lastname@example.org.
For More Information
If you are interested in learning more about this topic, please visit: https://www.allynintl.com/tax-services/exemption-certificate-management-solutions/ https://www.allynintl.com/tax-services/tax-technology/
Allyn provides additional Tax Resources available at: https://www.allynintl.com/en/tax-services/tax-resources/reference-materials/
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 and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit www.allynintl.com.