For many years, exemption certificate management has been a low priority for corporate accounting and tax departments. As a result, professionals have resorted to manual processes with certificates saved in paper files or shared drives. With various implications surrounding the 2018 Supreme Court ruling South Dakota v. Wayfair, companies are reconsidering their manual processes and assessing the risks associated with missing or incomplete exemption certificates.
How Do Companies Manually Store Sales Tax Exemption Certificates?
When we assist clients with reviewing paper certificates, several problems jump out, such as:
- Outdated and expired forms: It is not unusual for companies to store paper copies of certificates for years – or even decades – under certain circumstances. If audited, and the form has either expired or an older version of the certificate is no longer accepted, a company will have sales tax exposure.
- Missing information: During a sales tax audit, the state auditor requires the business to present a complete form. Missing signatures, addresses, or tax ID numbers could result in an invalid certificate.
- Lack of audit trail: For large companies with thousands of clients, it can become difficult connecting exemption certificates to specific customers or transactions. Many forms are single-use based on specific projects. In certain industries, it is possible to have several copies for a single customer. Customers may also purchase products or services in multiple states, and without an accurate map of this activity, a company has tremendous audit risk. There are also times customer information on the certificate is not clear or missing important details. This proves to be another challenge when managing certificates.
Although there are some organizational benefits of using an electronic copy, the previously mentioned risks can still apply.
Who Bears the Risk of Exemption Certificate Financial Exposure?
Sales tax is considered a trustee tax where the company that collects a tax is an agent for the state. Subsequently, the corporate veil does NOT protect companies that don’t comply with sales tax regulations. In fact, the risk of personal liability begins with the company’s owner, then the corporate offices, and in some states to a designated responsible person.
Often, we see sales tax audits for insolvent companies that have resulted in tax warrants for owners, officers, and directors.
Why Are Risks and Exposure Greater Since the South Dakota v. Wayfair Ruling?
Before June of 2018, the law required companies to collect exemption certificates only in states with a physical presence or nexus. For example, a $40M manufacturer with one plant in Ohio needed only to collect certificates for shipments to Ohio locations. In June of 2018, the Supreme Court changed state nexus for sales tax from physical to economic. In general, the threshold for sales since the ruling is $100,000 or 200 transactions in the previous or current year, with some state thresholds varying. Under this new rule, the $40M manufacturer may need to collect sales tax exemption certificates in every state with over $100,000 in sales.
From our experience, this could mean 10-15 additional state requirements resulting in hundreds of different certificates.
What is the Alternative to My Current Manual Process?
The best alternative is a SaaS or software-based certificate management tool. Most sales tax exemption certificate tools fall into two types of functionality:
1. Medium to Large-Size Companies: Integration into an ERP and Billing System
The advantage? A more seamless process for companies to obtain certificates during a new customer onboarding. This method also allows companies to review certificates for validity and possible renewals automatically.
The downside? The cost and time of integration.
2. Small to Medium-Size Businesses: SaaS Platform without Integration
The advantage? This method offers all the necessary tools to communicate with your customer and complete the validation and renewal process for certificates. Plus, an immediate implementation for this type of platform requires significantly less upfront cost.
Other Considerations When Upgrading Your Manual Processes
For small to medium-size businesses considering a technology platform, it is important to understand that no process is 100% automated. When resources are limited, a company should evaluate the professional service team supporting the technology. Deep technical knowledge and audit experience are valuable when choosing your technology solution.
Ready to Upgrade Your Manual Exemption Certificate Management Processes?
Contact us for a free consultation or learn more about PMBA’s proprietary exemption certificate management software below.