Properly Managing Customer Provided Sales Tax Exemption ... · •Responsibility for managing sales...

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

Agenda

The Sales Tax Process

Exemption Certificates

Controlling the Process

A Look Ahead

The Sales Tax Process

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.

Exemption certificates, who manages them?

Source: CRF Survey 2017

Sales tax transactions – tax exempt

Source: CRF Survey 2017

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.

• 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.)

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

• Can I find the physical

papers?

• Does the buyers name

match the invoice?

• Did you assume

exemption for

government or exempt

• 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

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

Exemption certificates defined

• When should you use certain certificates?

– MTC, SST, State specific

Understand your exemption certificate forms

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

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

Customer

Supplier

Delivery

Supplier price

Controlling the Process

Common problems

• Audit trends and changing regulations

• Invalid or incomplete exemption forms

• Contractors and job specific exemptions

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?

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

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 _________

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

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

Document management solutions

Excel Spreadsheets Shared Directories Dedicated Tax Software

PROS CONS PROS CONS PROS CONS

• Low cost

• Easy to

• Data only

• No images

• No

collection

• No form

library

• Image

storage

• Low cost

• No data

• Searching

issues

• No collection

• Stores

images and

• Good

search

capabilities

• Links to

invoicing

• Includes

collection

• High cost

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

• Good

search

capabilities

• Links to

invoicing

• Includes

collection

• High cost

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

A Look Ahead

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)

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.

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

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

Questions

Properly Managing Customer Provided Sales Tax Exemption ... · •Responsibility for managing sales...

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