Exemption Certificate Best Practices Benefits Risks How To

Exemption Certificate Best Practices Benefits, Risks, & How To Do It Right © Avalara 1

Agenda 1. Overview of Exemption Certificates • Collection • Validation • Storage 2. Exemptions & Customer Service 3. Avalara Cert. Express 4. Questions & Contacts © Avalara 2

Disclaimer: The content provided in this presentation does not constitute sales and use tax, legal, or any other type of advice. You should always consult with a CPA, tax adviser, or an attorney before acting upon this information. We make no warranties, representations, or claims of any kind concerning the information presented in this presentation. If you would like us to review and provide advice on your particular situations, please contact CDM@Avalara. com © Avalara 3

Overview of Exemption Certificates © Avalara 4

Overview of Exemption Certificates? What are exemption certificates? • A form signed by a purchaser or purchaser's representative certifying that the items or services purchased will be used in a manner or for a purpose that qualifies the item or service for exemption from sales tax. • Sales tax exemption certificates enable a purchaser to make tax-free purchases that would normally be subject to sales tax. • The purchaser fills out the certificate and gives it to the seller. The seller keeps the certificate and may then sell property or services to the purchaser without charging sales tax. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 5

Overview of Exemption Certificates? Why do we need exemption certificates? • Legislature decides what the tax base is – what is taxable and what is not – Product based –food (but not candy), Rx & services • Legislature also allows for exceptions to otherwise taxable items – Use based – RESALE, manufacturing/production, R&D, teleproduction, interstate commerce, pollution control, agriculture, packing materials – Entity based – gov (federal, state, local), tribal gov, non-profit, church, hospital • Miscellaneous – – Direct Pay Permits Enterprise zones Boll weevil lumber products (very, very obscure) Documentation of sale details - Bill of Lading, Purchase Order, etc Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 6

Overview of Exemption Certificates? State by state considerations: • • NO universal rules on taxability or exemptions Each state decides – – • What is taxable What exemptions to allow How they define those exemptions How to document the exemptions For instance – – About half the states require non-profits to pay sales tax – Several states require state/local government entities to pay sales tax (CA, WA, AZ, etc) – Definition of manufacturing varies widely from state to state • Some include inventory control such as forklifts or conveyor systems, some do not • Some include repair parts to manufacturing equipment, other only include the initial purchase of equipment Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 7

Overview of Exemption Certificates? Financial impact on your business: • Sales and use tax audits – Disallowed exempt sales are a leading cause of audit assessments – Often comprise a third of audit liabilities – Errors can be extrapolated across a sample • Decelerates revenue – – – New Customers can’t be set up timely Orders on hold awaiting exempt certs Clients don’t pay invoices if tax incorrectly Want credit/rebill in order to pay Short Pay Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 8

Overview of Exemption Certificates? Financial impact on your business: • Customer Service – Customer field frantic calls for certificates under audit – Customer is billed incorrectly – Customer gets redundant requests for documents • Cross Departmental Inefficiencies – – • Short pays for tax must be resolved Tax only credits or checks issued Certificates are not easily accessed by multiple departments Compiling certificates in audit is messy and unorganized across multiple teams Compliance other than state tax audits – Difficult to comply with SOX – Internal audits time consuming – Reserves for audit liabilities Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 9

Overview of Exemption Certificates? Who is responsible for collecting them? • • No one, yet everyone Typically there is no single owner of the process Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 10

Overview of Exemption Certificates? Who is responsible for collecting them? Tax/audit burden Customer Service burden Administrative burden Source: CRF “Sales Tax Exemption Certificate Follow-Up” 2006 Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 11

Exemption Certificate Collection © Avalara 12

Exemption Certificate Collection Scaling between individual and bulk requests: • Individual requests – New customers – New shipping locations for existing customers • Large collection campaign – Upcoming or current audit – State requirements change • WA & LA in 2009 for resale • TX in 2012 & GA in 2013 for agricultural – Your company dynamics change • You acquired a company • You were acquired • Legal name or status change • Newly established nexus Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 13

Exemption Certificate Collection Hidden struggles when collecting exemption certificates: • Customers – who and where • Kick off Communication – – • Phone campaign Letter mass mailing Fax blast Email campaign Undeliverable - resend another method or remove from list (i. e. taxable) – Returned mail – Fax failed to go through – Bounced email • Track Responses – – • Certificates received Field questions – invoice #, dates, products, etc Response of taxable No response Send Escalating Reminders Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 14

Exemption Certificate Collection Available methods & tools: • Manual (primary method) – – • Technology – Web-based Software as a Service – – • Mail merge and spreadsheet tracking Certificates are rarely accessible Invalid certificates often submitted Internal controls lacking, time – consuming Workflow improvements can reduce staffing requirements by >80% Reduces skill set necessary by employees Increases compliance level significantly Instant accessibility across enterprise Outsource – Requires a fully defined process – Can remove the labor burden – Can remove the knowledge burden Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 15

Exemption Certificate Validation © Avalara 16

Exemption Certificate Validation Minimum Legal Components: – – – Name of the buyer AND seller Buyer’s permit number (or explanation why number not needed) Description of the property being purchased Nature of the business Signature Date Note: Be wary of company developed “Catch-All” certificates. You don’t want to go through the work of collecting certificates only to have an auditor throw out homemade versions due to the wrong questions/data points. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 17

Avalara Cert. Express Validation criteria: Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 18

Exemption Certificate Validation Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 19

Exemption Certificate Validation Good faith: • In order to satisfy Good Faith, sellers must perform sufficient due diligence that it pass the “smell test” or reasonable “gut check”. • In order to do this, sellers are required to have a familiarity with: – exemptions available in nexus states – exemptions available that can be reasonably performed with type of property sold – customer business types • In addition to basic items in last slide, includes: – – • Type of exemption claimed Correct form Completely filled out Name on certificate matches name on customer account Hidden Danger - Method of payment for government or exempt organizations Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 20

Exemption Certificate Storage © Avalara 21

Exemption Certificate Storage Centralized versus de-centralize • Best practice to centralize: reduces multiple requests to the same customer, duplicate efforts by different departments, and enables better training opportunities for employees Minimum: customer name, account number and state • Best practice is the minimum plus issue date, expiration date, and form name or exemption type Keep even obviously flawed certificates • Something is better than nothing When you receive updated certificates • Keep the older ones for historical data needed to back up previous transactions in audits Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 22

Exemption Certificate Storage Ongoing maintenance: • Expirations – 1 -10 years depending on the state and type of exemption – Have a method to check for an existing certificate to override an expired one to avoid “pestering” a proactive customer. – Best practice: self-imposed expirations when one does not apply to statute • Ongoing customer expansion that might create new tax liabilities – New branch/locations of existing customers – Drop ship products directly to end user • Expansion of your company – Creates nexus in new jurisdictions – M&A activity may require new certificates issued to/from new name Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 23

Exemption Certificate Storage Purchased tools: • Existing company processes or applications – Check with marketing or accounting for fax blasts or CRM • Exemption Certificate Management Software – – – – Specialized software (Saas) to manage: Customer communication Missing, incomplete, expired documents Tax changes and documentation requirements Integration to tax/billing system Visibility into compliance and potential liability Ava. Tax Certs (www. avalara. com) and www. Cert. Capture. com for example • Certificate Management Software AND Outsourcing – Outsourcer can do heavy lifting of clean up and software to keep ongoing compliance – Do not recommend having outsourcer or consultant alone – one time clean ups rarely work as a solution is not put in place for ongoing compliance Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 24

Exemption Certificate Storage Free tools: • Cert. Express – free online certificate creation wizard – www. certexpress. com • Validity checklist, white papers from Avalara – http: //www. avalara. com/resources/whitepapers – http: //www. taxrates. com/ • Sales Tax Blog including certificate topics – http: //www. taxrates. com/blog/ – http: //www. salestaxsupport. com/blogs/sales-use-tax/category/sales-tax-exemption-certificate/ • Sales Tax Webinars – nexus, certificates, audits, etc – http: //www. avalara. com/resources/webinars – http: //www. avalara. com/resources/thought-leaders • State Department of Revenue Websites Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 25

Exemptions & Customer Service © Avalara 26

Exemptions & Customer Service • Charge tax even though customer submitted a certificate – Customer short pays invoice – Customer does not pay invoice at all until resolved (often with government accounts) – Customer pays tax then wants refund • Do not tax even though no certificate is submitted – Questioned in audit so go frantically go back to customer – Bill tax after the fact • White paper available – http: //www. avalara. com/resources/whitepapers/customer-service-and-ecm Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 27

Exemptions & Customer Service • Risk mitigation in audits – Ongoing exposure is reduced – Existing exposure is understood and can be planned around • Efficient use of internal resources – Less repetitive handling of same documents/processes – Reduce additional process caused by mistakes – Less energy used to prepare for and manage audits • Improved customer relationships – Proactive in dealing with taxability issues – Ability to quickly know situation and take corrective action if necessary Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 28

Exemptions & Customer Service • Focus on benefits just mentioned – Map “life of an exemption certificate” company-wide – Identify stakeholders and involve other departments! • Use concrete examples – Specific customers who were frustrated (do you know the percentage of customer base exempt to project satisfaction? ) – Potential liability analysis with $ associated – Audit papers citing issues – Number of tax refunds with corresponding dollars and FTE – Number of orders on hold awaiting tax resolution • If public company, cite Reserve requirements that can be eased (i. e. more available cash) Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 29

Exemptions & Customer Service Automating using intelligent exemption certificate software enables you to: • Increase speed and ease of certificate collection. • Improve validity of certificates submitted by customers. • Decrease billing errors for non-taxed transactions due to ERP and tax decisio software having accurate information of which customers are sales tax-exempt. • Reduce non-taxed audit risk. Auditors end up finding very little to assess against. • Raise staff productivity by automating manual certificate processes. • Improve exempt customer purchase experience. • Eliminate manual entry of certificate data into the tax decision software and the customer data into Cert. Capture. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 30

Avalara Cert. Express © Avalara 31

Avalara Cert. Express Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 32

Exemption Certificate Collection 1 8 7 6 5 4 2 Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 33

Avalara Cert. Express Billing Integration: • Track which customers have provided exemption certificates on a state or jurisdictional level • Billing system should revert exempt flag upon expiration unless receive new certificate • Update billing system with valid certificate data to accurately and timely reflect new certificates received • White papers available – – http: //www. avalara. com/resources/whitepapers/automating-the-exemption-certificate-lifecycle http: //www. avalara. com/resources/whitepapers/avatax-certs-and-automation “We don’t have to issue credits to customers that we incorrectly charged for tax because we were unaware they were exempt. This makes everyone happier. Relationship management is less complex, and there is less rework. It is easier to extend credit and do billing. ” Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 34

Questions & Contacts Matt Patrick Regional Sales Manager Avalara © Avalara