Best Practices in Sales Tax Exemption Certificate Management

2015 Avalara CONFIDENTIAL & PROPRIETARY

Best Practices in Sales Tax Exemption Certificate Management

2 CONFIDENTIAL & PROPRIETARY

Business Consultant, Avalara404-388-3633 / [email protected] is a business consultant with Avalara, and is responsible for supporting the acquisition of new clients, as well as the expansion of existing clients solution portfolio.

Presenter

Aaron Hill


Agenda

Key definitions Exemption certificates common problems Results in audits and customer service Trends in sales tax exemption certificate management Starting an exemption certificate process Avalara CertCapture review Questions


What is Sales Tax? Consumption tax to raise revenue For state and local governments, no

part is Federal Only in USA, other countries have VAT Subsets include:

Seller Privilege tax Consumer tax Use tax Transaction Tax Gross Receipts Tax

Quill Case set the standards for interstate commerce. Supreme Court has refused to review any new cases


Definitions to Know

Nexus The obligation to collect tax in a state Tangible Personal Property (TPP) Goods for sale Exemption Certificate vs Business License A certificate

is a form a customer completes to claim no sales tax is due. A license is a state issued form that allows them to do business within the state

Direct Pay Special exemption allowing customer to pay tax directly to the state as needed

State vs Local Tax States such as LA, CO, AL have a local sales tax reporting need


What is Nexus?

Quill vs North Dakota Case set the standards of substantial and physical presence

Physical presence tests: Ownership of property in state Lease of property in state Employees in state: Installing, repairs,

training, tradeshow Delivering goods into state with company

vehicles Advertising, web pages, soliciting

If you have nexus, you must charge tax on invoices unless


Sales Tax Challenges

Not all transactions are clearly taxable Each state can have very different rules on how to

handle these items Trade-ins Cash discounts for paying early (2%/net 30) Freight Charges Maintenance fees / Installation charges Gratuities Write-offs, short pays Sales Tax Holidays


Tax Exempt Sales What are they?

Where do they happen?

What is required?


Drop Shipments

When a seller accepts an order from a buyer and then the seller contacts a third party to produce and deliver such goods.

You might be the Seller/Manufacturer or you may be the Buyer/Distributor.

Seller/ Manufacturer

Buyer/

Distributor

Customer

Invoice -normally not taxed

Resells the goods


Drop Shipments by State

States handle drop shipments differently: Some require delivery state

exemption certificate with home state Tax ID

Some require buyers home state certificate and customer exemption certificate

Others believe the buyer will always be taxable if not registered in the third party delivery state


Drop Shipments

From the Seller/Manufacturer view: Some states assume items for resale

and they are automatically exempt Some states require the third party

exemption certificate Some states tax based on Sellers price,

others based on Buyers price

From the Buyer/Distributor view: Must provide documentation to Seller

that goods are for resale (exemption certificates)

Must charge end customer tax if you have nexus


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

Transaction may be exempt if a certificate is provided: Resale of goods Manufacturers Enterprise Zones Agricultural


New Customer Onboarding

Are they tax exempt? Get the correct forms on file for them

before they order Collect the right form for their particular

situation Make sure your forms library is up to

date Will they be drop shipping? Get that

documented

Are they taxable? Get the tax rates established Do you have nexus in their shipping

states? Tax automation can address


Common Problems


Common Problems

Lack of Awareness Lack of Knowledge Lack of Process


Disastrous Results - Audits Headaches Financial Exposure Charging tax when you shouldnt Not charging tax when you should Impact on Accounts Receivable Billing issues


Trends in Sales Tax

Verification of sales tax registration numbers Why collect exemption certificates if all sales are non-

taxable? States using audit to collect information on fraudulent

and/or unregistered taxpayers Class action lawsuits over collecting tax Budgeting for audit exposure


Are you Trending in the Right Direction? Process Efficiencieso Searching for certificates taking hours, or

days?o Can you proactively update Buyer

information before needed?o Do your internal systems share exemption

information? Operational Costso Are you manually processing certificates,

and is it cost effective?o Are you losing any customers to a

competitor who provides integrated capabilities at the point of sale?

Exposure Risko Are audit penalties budgeted for?


Audit Challenges


Average Sales Tax Audit Cost

Average audit - $114,147 Compared to previous year, the average audit cost

grew by 19%

Source: Wakefield Research, October 2014


Common Mistakes Identified During Audits: Missing/inaccurate documents 39% Producing incorrect documents 31% Missing exemption certificates 30%

39%

31%

28%

CUSTOMERS INVOICED WITH TAXABLE PRODUCTS/SERVICES CALCULATED AS

NONTAXABLE24%

MISSING OR INACCURATE DOCUMENTS

PRODUCING THE INCORRECT DOCUMENT REQUESTED BY AN AUDITOR

CUSTOMER INVOKED AS TAX EXEMPT WITHOUT VALID EXEMPTION CERTIFICATE ON FILE 30%

CUSTOMER INVOICED WITH WITH THE INCORRECT SALES TAX RATE APPLIED TO THE CALCULATION

BUSINESS PURCHASES ELIGIBLE FOR USE TAX DID NOT ALSO INCLUDE USE TAX 27%


Sheet1

MISSING OR INACCURATE DOCUMENTS39%

PRODUCING THE INCORRECT DOCUMENT REQUESTED BY AN AUDITOR31%

CUSTOMER INVOKED AS TAX EXEMPT WITHOUT VALID EXEMPTION CERTIFICATE ON FILE30%

CUSTOMER INVOICED WITH WITH THE INCORRECT SALES TAX RATE APPLIED TO THE CALCULATION28%

BUSINESS PURCHASES ELIGIBLE FOR USE TAX DID NOT ALSO INCLUDE USE TAX27%

CUSTOMERS INVOICED WITH TAXABLE PRODUCTS/SERVICES CALCULATED AS NONTAXABLE24%


Audit Risk Question: If your company were audited for sales and use tax, how

likely or unlikely is it that the auditor would find a mistake?



Top Audit 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 tax software applications

Manual process leads to errors, increases audit risk and the actual cost of managing an audit should one occur


Software Solutions


Starting a Process

What is the total number of exempt customers?

What is the impact on the customer if invoice is incorrect?

Is your default standard to tax or not tax the customer?

Have you been audited and paid penalties?

What is your process for dealing with expirations?


Document Management Solutions1. Excel spreadsheets

a. Pros: Low Cost, Easy to useb. Cons: Data only, no images, no

collection tools, no form library

2. Shared Directoriesa. Pros: Image storage, low costsb. Cons: No data, searching issues, no

collection tools

3. Dedicated Software for Taxa. Pros: Stores images and data, easily

searched, links to invoicing, includes collection tools

b. Cons: Higher solution costs


Key Considerations

What is the total number of exempt customers? What is the impact on the customer if invoice is

incorrect? Is your default standard to tax or not tax the

customer? Have you been audited and paid penalties? What is your process for dealing with expirations?


Collect Valid Certificates

Manage update requests for missing and expired certificates

Seamless integration with ERP & tax software applications

Quick, anytime access for certificates and meta data

Solution Overview


The Avalara Solution


Secure LogonSecure access from any computer with no client

softwareEasily manage users and roles; for system and data access


Personalized DashboardsQuickly View Relevant Customer and Certificate

InformationFast access to missing and soon to expire certificates

Select from multiple widgets


Certificate RequestsSend single or bulk personalized requests for updatesSchedule timing and send options that drive the highest results

Personalized Cover Letter

Send via email, mail or fax

Define send date and requested

return date


Digital Certificate Submission

Offer customers an all-digital means to data response Improve results with auto-validation & easy mouse signature


Physical Certificate SubmissionOffer customers mail and fax optionsAlign request activities to unique customer preferences


System InputEasily enter certificate data into indexed, searchable

fieldsCreate powerful search, reporting and request campaigns


Search and ReportingQuickly search customers and certificatesFast access to exemption information to identify exposureSimple conversion to notification campaigns


Summary of Features to Evaluate

3CONFIDENTIAL &

Secure Online Web Portal & Signature

Flexibility/Customization Around Changing Requirements / Forms

Compatibility: Pre-built integrations with major sales tax engines

Scalability: Handle large volumes of certs, can grow with your business

Project Management: Depth of experience in implementing

Managed Services: Is an outsourced solution option available

Robust Reporting Engine: Automate reports & analysis

Features: Same As, Bill To / Ship To Relationships, Exposure Zones, etc.


Want to Learn More

3CONFIDENTIAL &

Visit Avalara.com

Contact Avalara Sales at (877) 780-4848

Talk to me, Ill be here for a few

Best Practices in Sales Tax Exemption Certificate ManagementPresenterAgendaWhat is Sales Tax?Definitions to KnowWhat is Nexus?Sales Tax ChallengesTax Exempt SalesDrop ShipmentsDrop Shipments by StateDrop ShipmentsCharge Tax or Not?New Customer OnboardingCommon ProblemsCommon ProblemsDisastrous Results - AuditsTrends in Sales TaxAre you Trending in the Right Direction?Audit ChallengesAverage Sales Tax Audit CostCommon Mistakes Identified During Audits: Audit RiskTop Audit ChallengesSoftware SolutionsStarting a ProcessDocument Management SolutionsKey ConsiderationsSolution OverviewThe Avalara SolutionSecure LogonPersonalized DashboardsCertificate RequestsDigital Certificate SubmissionPhysical Certificate SubmissionSystem InputSearch and ReportingSlide Number 37Slide Number 38

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Best Practices in Sales Tax Exemption Certificate Management