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© AVALARA CONFIDENTIAL & PROPRIETARY
Properly Managing Customer Provided Sales Tax Exemption Certificates
2 © AVALARA CONFIDENTIAL & PROPRIETARY
About the Speaker
Silvia Aguirre,
• General Manager, Certificate Management
• Co-Founder, Avalara CertCapture(formerly known as: TTS)
• Former Texas state auditor
© AVALARA CONFIDENTIAL & PROPRIETARY3
Agenda
The Sales Tax Process
Exemption Certificates
Controlling the Process
A Look Ahead
Q&A
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The Sales Tax Process
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Overview
• Responsibility for managing sales tax exemption certificates falls upon the credit team
• Responsibility for managing sales tax audits falls upon the tax team
• State taxing authorities recognize the mismanagement of exemption certificates and see it as one of the easiest ways to collect funds for the state
• Combining the various state tax rates, sales tax makes up approximately 47% of total state revenue
State sales tax audits can be a fact of life or an unwelcomed surprise.
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Exemption certificates, who manages them?
Source: CRF Survey 2017
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Sales tax transactions – tax exempt
Source: CRF Survey 2017
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Sales tax basics
Everything is taxable until proven otherwise
It is the responsibility of the seller to act as an agent for the taxing jurisdiction and collect and remit the proper amount of
sales tax.
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Nexus
• You must collect sales taxes OR exemption forms if you have Nexus in a state
• Standards have been set by the Quill Vs. North Dakota case
• Nexus is being redefined by many states
In most states, a “physical presence” usually
creates nexus and can mean a number of
things, including:
• Having an office
• Having an employee
• Having a warehouse
• Having an affiliate
• Storing inventory
• Drop shipping from a 3rd party provider
• Temporarily doing physical business in a
state (trade show, fair, etc.)
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Exemption Certificates
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Key issues for exemption certificates
Is the form on file? Is it the correct form?
Is the information
accurate and
complete?
• Is it just a number on
file?
• Can I find the physical
papers?
• Does the buyers name
match the invoice?
• Did you assume
exemption for
government or exempt
org?
• Has it expired?
• Is it for the correct
State?
• Does it cover the
correct reasons? (MTC)
• Buyer AND seller name
• Tax ID number
• Signature/Date
• Reason for exemption
• Description of
purchase
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Exemption certificate issues
• State by state rules– Each state can determine how to tax products
– Exempt organizations are determined by local government
– Forms are normally state specific
• Expirations need to tracked– Most states never expire
– Some expire based on state form or type of exemption claimed
– Some expire based on calendar year, others based on signed date
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Exemption certificates defined
• When should you use certain certificates?
– MTC, SST, State specific
Understand your exemption certificate forms
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Exemption Certificates
Resale Certificates• Merchandise intended for resale
• Tangible personal property purchase to lease or rent
• Taxable service performed on tangible personal property in resale inventory
Other Types• Direct Pay Permits
• Manufacturing Exemptions
• Agricultural Cards
• State Issued Letters
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Exemption certificates: drop shipments
Consideration of sales tax in drop shipments
– Is the Seller registered to collect tax in the destination state?
– Is the Buyer able to provide an exemption certificate in the destination state?
Seller/Buyer
Resale Certificate
Seller price
Order
NEXUS
Customer
Supplier
Delivery
Supplier price
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Controlling the Process
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Common problems
• Audit trends and changing regulations
• Invalid or incomplete exemption forms
• Contractors and job specific exemptions
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Customer onboarding
Tax exempt customer
• Collect the correct form before they order
• Ensure your forms library is up-to-date
• Ask: Will they be drop shipping?
Taxable customer
• Establish the tax rate
• Taxrates.com: Free table of rates by zip code
• Ask: Do you have nexus in their shipping states?
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Evaluate your current process
1. Know when to collect a certificate or charge tax
2. Ensure you’re collecting the correct tax exempt forms
or proper taxes
3. Inventory how many exemption certificates you
currently have and how much they’re worth
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Exemption certificate review
Examine existing documents
• Catalog your current forms
• Inventory the incompletes
(missing data)
• Record expiration dates (if any)
Inventory internal forms
• Type of forms ___________
• Total number of forms _________
• Number of valid forms __________
• Number of invalid forms __________
• Number of missing forms _________
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Top challenges
• Labor and time costs associated with finding exemption documents that were used for the sales under audit
• Deciding whether customer satisfaction or audit compliance is top priority
• Lack of integration between exemption certificate process and third-party tax software applications
• Manual process leads to errors, increases audit risk and the actual cost of managing an audit should one occur
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Automation and linking systems
Integrating with your tax software
• Islands of automation offer limited value
• Integrated solutions required for end-to-end
• Many different ERP and Tax SW applications
Returns System
Tax Engine
ERP/Customer Database
E-commerce
Back-office
Web portal for
customers
Retail
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Document management solutions
Excel Spreadsheets Shared Directories Dedicated Tax Software
PROS CONS PROS CONS PROS CONS
• Low cost
• Easy to
use
• Data only
• No images
• No
collection
tools
• No form
library
• Image
storage
• Low cost
• No data
• Searching
issues
• No collection
tools
• Stores
images and
data
• Good
search
capabilities
• Links to
invoicing
• Includes
collection
tools
• High cost
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Reasons to automate
• Process Efficiencies
─ Updating documents
─ Sharing information
─ Updating customer/vendor information
• Operational Costs
─ Reduce costs
─ Customer retention
• Exposure Risk
─ Visibility into exposure risk for management
─ Audit readiness
Dedicated Tax Software
PROS CONS
• Stores
images and
data
• Good
search
capabilities
• Links to
invoicing
• Includes
collection
tools
• High cost
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Document if you charge tax or not
• Product Exemptions are cases where the items being purchased are exempt tax by law:
– Services
– Food
– Medicine
• Entity Exemptions are organizations that are exempt by law:
– State agencies
– Schools
– Charities – normally specifically identified
– Hospitals
• Purchase may be exempt if a certificate is provided:
– Resale of goods
– Manufacturers
– Enterprise Zones
– Agricultural
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A Look Ahead
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Exemption certificates: a look ahead
• Less exemptions allowed, wider tax base in exchange for lower tax rates
• Nexus standards being challenged
• Economic Nexus based on total sales in a state
• National standard for audit and exemption forms under next generation of streamlined sales tax
• Shorter life span on exemption forms (WA, LA, AL, GA)
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Exemption certificates: a look ahead
Future of sales tax
Tax collection (or exemption collection) will eventually be required by all companies on all sales. Short term, only the companies with over $100,000 in sales in a state will be required to comply. Eventually everyone will be required to file and be subject to audit.
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Exemption certificates: a look ahead
1. EDUCATE employees
2. STAY up-to-date
3. USE the correct forms
4. ENSURE documents are current/valid/complete
5. CREATE a seamless experience for both in-store and online
shopping
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Three steps to improve your process today
1. Document exempt buyers as part of the new customer on-boarding process
2. Set a policy to review form expirations on a regular basis
3. Enforce a policy of taxation if no current/valid exemption forms are present
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Questions