Economic Nexus Puts Spotlight on Exemption Certificates
Companies with tax exempt sales are not immune to economic nexus requirements, making exemption certificate management more important than ever. Manufacturers, for example, may now have new registration requirements in some states if economic nexus thresholds are met. Many states measure these thresholds based on total gross sales (taxable and non-taxable). Some states even require companies that make wholesale-only sales to register.
Make no mistake, most states are requiring remote sellers, including manufacturers, who meet economic nexus requirements to either collect sales tax for in-state transactions or maintain valid exemption certificates from customers.
Lack of exemption certificates is typically the largest area of assessment under a sales tax audit. A good system needs to be in place to collect, validate, store and manage these documents.
For a list of states with economic nexus laws, as well as the thresholds, look at Cherry Bekaert's free Nexus Charts. Here are important questions to answer about your company's exemption certificate management procedures:
1. When were exemption certificates last reviewed?
Many state exemption certificates are only good for three years. Even if they do not expire, it is a good idea to periodically review your documentation to support all exempt sales. Often times when a new customer is set up, an exemption certificate will be received for State A; however, after doing business with them for many years, you are selling products into States A,B,C,D, and E. Do you have certificates to cover states B-E?
2. Where are your exemption certificates stored?
Exemption certificates not only need to be collected but a system should be in place to manage the certificates. It is best for all certificates to be centrally located. Not all auditors are lenient with obtaining exemption certificates that are missing or not readily available.
3. Is your certificate process jeopardizing customer relationships?
What if you have a customer who has provided an exemption certificate to you but continues to receive invoices with sales tax on them? Do you think they will get frustrated and eventually seek another supplier? Or will they possibly continue to short pay the invoices creating headaches for your Accounts Receivable department?
4. Is it time to automate your exemption certificate management?
Companies need to look at their customer types, risk tolerance and resources, and then develop a game plan for exemption certificate compliance. Automation may be the way to go. Exemption certificate management (ECM) software automates certificate collection and improves the validity of certificates that are collected from customers. It also reduces staff time and effort in preparing for and managing auditor requests.
In today’s post-Wayfair world where economic nexus is center stage, auditors are requiring proof of exempt sales. Lack of valid exemption certificates can have significant financial impact on companies under audit.
For more information about exemption certificate management, visit the Cherry Bekaert sales and use tax website.