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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?