Posted on September 03, 2021
Generally speaking, sellers are required to charge sales tax on all transactions of taxable products or services, however, there are some exceptions. Some of the more common exceptions are when sales are made directly to the Federal Government, if the buyer intends to resell the item in question, or if it will become a part of a manufactured final product.
In the United States, state sales tax rates vary from 4.44% to 9.55% depending on the State in question. There are a multitude of reasons including the previously mentioned as to why an otherwise taxable transaction may be considered exempt from but they tend to vary by jurisdiction and they must be properly documented. These documents are known as exemption certificates
As you can imagine, this creates a rather burdensome process. Not having an efficient mechanism to collect these exemption certificates can lead to overwhelming tax liabilities. An unexpected sales tax bill due to a poorly managed exemption certificate process can easily reduce or even completely wipe out profitability margins.
What is Exemption Certificate Management?
An exemption certificate is a form presented by an purchaser to the seller when making a tax-exempt purchase. Exemption Certificate Management (ECM) is known as the process of collecting, validating, renewing, maintaining, and storing exemption certificates. When most people think of a well-functioning business, exemption certificate management is probably not the first, or even the fifth, aspect that comes to mind. Unfortunately, ECM is something that is commonly overlooked by many businesses. Although it may sound straight forward, there are many things that can potentially go wrong and cause unnecessary hardships and expenses as a result of a poorly managed ECM process.
It can really come down to something as small as misfiling an exemption form or accidentally damaging the document that can lead to a disastrous chain of events for your business. A State’s Department of Revenue will commonly audit taxpayers for sales and use tax on a 3-to-4-year cycle. Imagine having to look for an exemption certificate relating to a transaction that occurred over 3 years ago. Without a proper ECM process any number of things can get in your way. Chances are you do not remember where you put it, or after hours of looking through old folders you find it just to realize that it is incomplete or expired, or better yet one of your coworkers accidentally spilled coffee all over it and just shoved it back into the filing cabinet. Now more than ever, proper ECM can offer a wide range of benefits including increased tax compliance, decreased tax liability, decreased audit risk, as well as the ability to spend time saved on other areas of the business.
3 Tips to Improve you ECM Process
Every business is different, but there are some simple techniques that can help just about every business create a more efficient and reliable ECM process.
Firstly, and probably the most important tip regarding ECM is to have a good storage system in place. The preferred method would be to have all exemption certificates uploaded to an easily accessible server. Realistically there are some technological requirements but even a simple setup can end up saving you a lot of time. A properly maintained database can ensure you do not damage or misplace any exemption certificates. It is 100 times easier to type something into a search bar and wait a couple of seconds to find a particular exemption certificate, than having to look through hundreds, possibly thousands, of old documents just to find out you were looking in the wrong filling cabinet. It is also important to mention that if you opt for a digital storage system it is imperative that you have appropriate security precautions in place.
Second piece of advice is to have a backup and something like a log that you can use to cross reference. Two copies of the same exemption in the same place is not a backup! A good idea is to have one digital and one physical copy or perhaps both digital but on separate hard drives or locations. It can be pretty easy to lose a document or accidentally save a file in the wrong place. Keeping a descriptive log and separate copies of exemption certificates can really make a difference and save you a great deal of time and a lot of headaches.
Lastly, is to know what constitutes a valid exemption certificate. You could have the most high-tech digital cloud storage system available for your exemption certificates, but if they are invalid all of that is not going to help you during an audit. For a more detailed look at what a valid exemption certificates needs reference one of our previous articles “3 Basics of Exemption Certificates” which outlines the basic 7 requirements of a valid exemption certificate. This article and our many other tax publications can be found under News & Publications at www.allynintl.com.
Having dedicated ECM software can make the whole process virtually painless. In most cases good ECM software can safely store your certificates, keep track of expiration dates, and provide an effective way to locate exemption certificates in case they are requested. Although development of ECM software may not always be a viable option for a business, there are other alternatives. One such alternative would be to rent the software or to hire a firm with these capabilities.
How we can help
There is undeniably a great deal of firms capable of managing exemption certificates, but not many like Allyn International. We offer the highest degree of experience, technical expertise, and in-house developed software designed to create an ECM process that is as painless and efficient as possible. Thanks to our vast pool of resources, experience, and tax knowledge here at Allyn International, we have been able to develop an exceptional proprietary software, CERTlocker, which has enabled us to create an extremely time effective ECM process. Not only does CERTlocker allow us to quickly find and update exemption certificates, but it also provides a safe storage option that our clients can also access and utilize.
Allyn International has seen businesses without a strong process for collection and validation struggle to produce exemption certificates during a sales tax audit. This resulted in initial audit liability estimates of nearly $2 million in tax for a single state just related to exemption certificates. Conversely, we have managed and completed sales tax audits for clients resulting in $0 liability on sales thanks to a solid ECM process. Each state has different specifications for exemption certificates accepted and how they are applied, which is why it is of great value to have a team with extensive tax knowledge ready to assist.
Allyn provides 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.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News & Publications at www.allynintl.com.
Contributor: Francisco Fischetti
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.