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Exemption Certificate Management in Sales Tax ComplianceSharpening Your Company's Approach to Verifying, Storing and Retrieving Certificates

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, MARCH 29, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Tony Turner, Regional Manager, CertCapture, Houstony , g g , p ,

Steve Oldroyd, Tax Senior Director - Sales & Use Tax, Property Tax, BDO USA, San Jose, Calif.

Sean Evans, Director, Tax Advisory Services, DuCharme McMillen and Associates Inc., Overland Park, Kan.

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E ti C tifi t M t i Exemption Certificate Management in Sales Tax Compliance Seminar

March 29, 2012

Sean Evans, DuCharme McMillen andAssociates [email protected]

Steve Oldroyd, BDO [email protected]

Tony Turner, CertCapture [email protected]

Today’s Program

Trends In State And Local Sales Tax Audits[Steve Oldroyd]

Slide 7 – Slide 12

Procedures For Gathering, Validating Certificates At The Purchase Location[Steve Oldroyd]


Audit-Related Issues[Sean Evans]


Evaluating And Applying Technology[Tony Turner]


TRENDS IN STATE AND LOCAL Steve Oldroyd, BDO USA

SALES TAX AUDITS

BackgroundBackground

Sales tax is generally one of the largest sources of revenue for a state.

Approximately one-third of all state revenues are derived from the collection of sales and use tax nationally.

State budget deficits

Sales and use tax audits major source of a state’s revenue • Increased number of audits• Increased exemption and resale certificate documentation required• Increased exemption and resale certificate documentation required• Effects of missing certificate in an audit sample

8

Sales TaxSales Tax

Seller is required to charge and report sales tax on all taxable sales Seller is required to charge and report sales tax on all taxable sales made within the seller’s home state

A ll i i d t h d t ll ’ t i t t t A seller is required to charge and report seller’s use tax on interstate sales when the seller has nexus or has voluntarily registered to collect in a state.

9

SalesSales

All sales are taxable unless exempted by statute: U.S. government Resale ServicesServices Interstate and foreign commerce Manufacturing Research and development Research and development State and local governments Not-for-profit

10

Exemption Certificates Exemption Certificates There are three basic types documentation to support an exempt sale:

Resale certificates Exemption certificates Manufacturing Research & development Pollution controlPollution control Not-for profit Government Di t tifi t Direct pay certificates

11

Exemption Certificates (Cont ) Exemption Certificates (Cont.)

Exemption/resale certificates must be taken:

Good faith Timely Timely Signed Dated Buyer’s registration number notated Buyer’s registration number notated Describe the buyer business Describe the property purchased Acceptable format for the state

12

PROCEDURES FOR Steve Oldroyd, BDO USA

GATHERING, VALIDATING CERTIFICATES AT THE CERTIFICATES AT THE PURCHASE LOCATION

Exemption Certificate PolicyExemption Certificate Policy

Always obtain resale certificates from customers!

Copies of the sales/use tax permits are not acceptable. Incomplete certificates are unacceptable.Incomplete certificates are unacceptable. Blanket is good for all future sales to customers until cancelled in

writing or overridden. A taxable purchase order may override a blanket certificate A taxable purchase order may override a blanket certificate. Specific certificates “See Purchase Order” for taxability. If an exemption certificate is not on file, the state can assess the tax

against the seller against the seller.

14

Recordkeeping And ExemptionRecordkeeping And ExemptionCertificate Management

Maintain timely and valid exemption certificates

Routinely update exemption certificates

Never destroy an exemption certificate Create a permanent file for original Work off copy or electronic exemption certificatespy p

15

Responsible Party? Responsible Party? Accounts receivable department Credit department Store managers General accounting Tax department

Routinely update exemption certificates y p p

Never destroy an exemption certificate Create a permanent file for original Create a permanent file for original Work off copy or electronic exemption certificates

16

TrainingTraining

Policy and training manual y g Formal policy manual Instructions on acceptable exemption certificates For each responsible department For each responsible department

Formal training classes Contact information

Periodic meetings with various departments Policy changes Law changes Audit issues Customer issues

17

AUDIT RELATED ISSUESSean Evans, DuCharme McMillen and Associates Inc.

AUDIT‐RELATED ISSUES

BUDGET GAP 2011

WAAK ME

VT

NHNYMIWI

MNND

SDWY

MT

WA

IDOR

MA

CTPA NJ

MDDC

DE

VAWVIL OHIN

MI

KYMOKS

IANE

COUT

WYNV

CA

RI

HINC

SCGA

TN

ALMSLA

TX

OKNMAZ AR

LA

Source: National Conference of State Legislatures

Key:

More than 15% of the state’s general fund

10% to 15% of the state’s general fund

Less than 10% of the state’s general fund

FL

NORTH AMERICA’S TRUSTED CHOICE FOR CORPORATE TAX SOLUTIONS

DuCharme, McMillen & Associates, Inc. All rights reserved. Reproduction of this document or any portion thereof without written consent is prohibited.19

“Update On State Budget Gaps: FY 2011”Less than 10% of the state s general fund

Not applicable

BREAKDOWN OF STATE AND LOCAL TAX REVENUE

T b i t 36%Taxes on business property ‐ 36%

Sales tax on business inputs ‐ 22%

Excise, utility and insurance taxes ‐13%

Corporate income tax ‐ 9%

Unemployment insurance tax ‐ 5%

Individual income tax on business income ‐ 6%

Business license and other business taxes ‐ 9%



Estimates based on data from the U.S. Census Bureau, State & Local Finances

Missouri

Sales and purchase

Audit



MISSOURI: SALES AND PURCHASE AUDIT

Audit assessment

Assessment Calculation % of Total Assessment

Exemption Certificates ‐ Invalid or Unable to Retrieve 0%

Taxable Fixed Assets 19%Taxable Fixed Assets 19%

Taxable Expense Items 81%



MISSOURI: SALES AND PURCHASE AUDIT (CONT.)

Results: Purchase side Fixed assets

• Auditor reviewed 100% of fixed‐asset purchases.• No use tax accrued (general maintenance machinery and Equipment• No use tax accrued (general maintenance, machinery and Equipment,

truck lease, etc.) Expenses• Auditor sampled expense items.• No use tax accrued (lubricants, general maintenance, etc.)• Purchase cards



MISSOURI: SALES AND PURCHASE AUDIT (CONT.)

Results

Exemption Certificates Sampled by Auditor Result % of Total SampledExemption Certificates Sampled by Auditor Result % of Total Sampled

On file and valid 48 94%

Retrieved from customers 2 4%

Invalid or unable to retrieve 1 2%

Total Exemption Certificates Sampled By Auditor 51 ‐



Florida

Sales and purchase

Audit



FLORIDA: SALES AND PURCHASE AUDIT

Results

Exemption Certificates Sampled By Auditor Result % of Total SampledExemption Certificates Sampled By Auditor Result % of Total Sampled

On file and valid 48 94%

Retrieved from customers 2 4%

Invalid or unable to retrieve 1 2%

Total Exemption Certificates Sampled By Auditor 51 ‐



FLORIDA: SALES AND PURCHASE AUDIT (CONT.)

Results: Purchase side Fixed assets

• Auditor reviewed 100% of fixed‐asset purchases.• No use tax accrued (general maintenance machinery & equipment• No use tax accrued (general maintenance, machinery & equipment,

truck lease, etc.) Expenses

• Auditor sampled expense items.• No use tax accrued (lubricants, general maintenance, etc.)• Purchase cards



FLORIDA: SALES AND PURCHASE AUDIT (CONT.)

Audit assessment

Assessment Calculation % of Total Assessment

Exemption certificates ‐ Invalid or unable to retrieve 0%

Taxable fixed assets 19%Taxable fixed assets 19%

Taxable expense items 81%



DROP SHIPMENT: WHAT IS IT?

Involves at least three parties and two sales

Retailer:1. Accepts an order from a customer,2 Purchases goods from a third party and2. Purchases goods from a third party, and3. Directs third party to deliver goods directly to customer.

Third party sells to retailer, which sells to the customer.



DROP SHIPMENT: RESALE EXEMPTION?

General rule: Most states exempt the third‐party supplier’s sale to the retailer as a sale for resale.

Retailer gives the third‐party supplier a resale certificate.

Which state’s certificate and tax registration number?



DROP SHIPMENT: WHICH STATE?

If both the retailer and third‐party supplier are registered in the destination state, the retailer uses that state’s resale certificate and registration number. Retailer collects that state’s tax from customer.

If neither the retailer nor the third‐party supplier is registered in the destination state, neither is required to collect that state’s tax. The customer owes use tax.

A tax problem may arise when the retailer is not registered in destination state but the third‐party supplier isstate, but the third party supplier is.



DROP SHIPMENT: RETAILER NOT REGISTERED?

What if the retailer is not registered in the destination state, but the third‐party suppler is?

Most states allow the retailer to use its home‐state registration number Most states allow the retailer to use its home state registration number on the destination state’s certificate or on a multi‐state certificate.

The retailer purchases an item tax free but isn’t required to collect the The retailer purchases an item tax‐free but isn t required to collect the destination state’s tax. The customer owes use tax.



DROP SHIPMENT: WHAT’S THE PROBLEM?

What if the retailer is not registered, but the third‐party suppler is?

A few states don’t exempt sales to a retailer that is not registered in the state. A third‐party supplier registered in these states must collect taxstate. A third party supplier registered in these states must collect tax from the retailer. Examples:

California Florida Florida Louisiana Oklahoma



DROP SHIPMENT: WHAT’S THE TAXABLE AMOUNT?

What if the retailer is registered, but the third‐party suppler is? (Cont.)

Most of the problem states require a third‐party supplier to collect tax on its sales price to retailer The customer owes tax on theon its sales price to retailer. The customer owes tax on the difference.

Exceptions: California: Supplier must collect tax on sales price to retailer

plus 10% markup,plus 10% markup. Massachusetts: Supplier must collect tax on retailer’s price to

customer.



NATURE OF DOCUMENTATION

There are many different types of exemption certificates.There are state‐proscribed forms issued for several purposes.The Multistate Tax Commission (MTC) issued a certificate for resale

purposes.Purposes of exemptions:

Resale Industryy Property Exempt organization Direct pay permit holdersDirect pay permit holders

Must be taken in good faithObtained in a timely fashion



NATURE OF DOCUMENTATION (CONT.)

Most states allow certificates to be maintained indefinitely.Other states have specific expiration periods for exemption certificates.

Proper internal controls and a formal certificate management system should minimize tax exposure in this area.

C l t f lid tifi t ifi d d i ditCommon elements of a valid certificate verified during an audit:

Seller’s and purchaser’s names and addresses

Seller’s and purchaser’s registration number Seller s and purchaser s registration number

Business description of purchaser

Description of property purchasedDescription of property purchased

Statutory reference of item being purchased

Date (on or before date of sale)



Authorized signature

MOST ORGANIZATIONS HAVE A MANUAL PROCESS FOR EXEMPTION CERTIFICATES

Who Can Accept Customer Exemption Certificates?

Exemption Certificate Management Automation Level

15%10%3%

21%

28%31%

7%

13%

72%

Customer service representativeTaxSalesAll of the aboveAnybody can accept exemption certificates

Manual

Semi-automated

Automated



We do not accept exemption certificatesAutomated

“GOOD FAITH”

Non‐SSTP full‐member states face two requirements: Must have the appropriate certificate in file under the correct time frame

required Must be believableMust be believable If both of these requirements are not proven, the state can refuse the

exemption under audit. The burden of proof of exemption is on the SELLER The burden of proof of exemption is on the SELLER.

States using the SSTP exemption form: Must have the appropriate certificate on file under the correct time

frame required The burden of proof of exemption is on the BUYER.



STREAMLINED STATE STATUS AS OF 2012

WA

Streamlined State Status 10-01-09

AK MEVT

NHNYMIWI

MNND

SDWY

MT

WA

IDOR

MA

CTRIPA NJ

MDDE

VAWVIL OHIN

MI

KYMOKS

IANE

COUT

WYNV

CA DC

HINC

SCGA

TN

ALMSLA

TX

OKNMAZ AR

Full‐member statesKey

FL

LAFull member states

Associate member states – Flex to full

Advisory states – Not conforming

Non‐sales tax states



Project states – Not advisory

Non‐participating state

EVALUATING AND APPLYING Tony Turner, CertCapture

EVALUATING AND APPLYING TECHNOLOGY

Technology

• Certificate automation is a growing trend.

• Audit response time improves significantly, reducing the number of hours required g qto locate certificates.

• Audit liabilities reduce significantly as a direct result f d iof automated reporting,

tracking and features‐rich soft aresoftware.

41

Audits

• Companies of all sizes, small and large, face potential liabilities from certificate pexposure.

• Manual systems provide the mostManual systems provide the most exposure. It can be difficult and costly to maintain these on an ongoing basis.

• Certificates represent easy targets for auditors when they expire, or when y pcompanies go out of business or are purchased.

42

Alternatives To Storing Certificates

• Indexing and scanned images– A good start but falls short ofA good start, but falls short of providing measurable ROI

– Referred to as “dumb scans,” digital images continue to present

i t i d i ditmaintenance issues during audit engagements.

– Certificate validation remains a significant issue when a taxpayer is only maintaining images. 43

Automation

• True certificate automation provides easy reporting features that track and provide reporting on:p p g

– Expiration dates– Missing certificates– Invalid certificates– Nexus requirements– Audit reportsp

44

Automated Request And Collect

Exemption Certificates

@

Certificates

@E-mail, mail, scan, fax and Web portal

Automated requests for certificates are sent in

multiple formats.

Accepts certificates from various sources and stores them as pdf files

ECM SolutionECM Solution45

Integration

Exemption

E-mail, mail, scan, fax and Web portalCertificates

ECM SolutionCustomer

Data Feed

Export FilesAPITax

ERP

SAPVertex

OneSource

CCHFeed APIsoftware

ORACLESAP

ADP TaxwareOneSource

46

Cost Vs. Benefit

• Traditional manual systems can present hidden tax traps that may result in i ifi li bili isignificant liabilities.

• Certificate management software can be glow‐cost and easy to implement; provides quick and easy audit response tools.

• It reduces the time required to gather certificates. It allows you to monitor validity on an onto monitor validity on an on‐going basis and always know the state of your certificate database with little effort.

47

Certificate Policy

• What are your company SOX requirements regarding certificate maintenance?regarding certificate maintenance?

• Can certificates be tracked to specific pindividuals who are responsible for validating certificates?

• What type of history can be d d i d i fproduced in order to satisfy

compliance issues?

48

Certificate Retrieval

• How quickly can certificates be retrieved using automation, and be provided to the auditor?– Automated tools eliminate the arduous amount of time required to gather and prepare for an audit review.

– Response can be as easy as copy and paste.

d h b• Does an auditor have to be on‐site to review certificates?– With automation, validated reports are accessible , ponline, without an auditor having to be on premises.

– Advanced audit tools are available to manage how long an auditor can have access to various reportslong an auditor can have access to various reports.

49

Existing Technology

• What is in place now?

– Manual retrieval from deep, dark dungeons? – Old certificates with ink that is difficult to read?– Does anyone really know what is on file?– Expired certificates?p– Missing certificates?– Valid certificates?Valid certificates?– Dumb scans?

50

Automation Alternatives

• Various solutions exist, depending on company industry and

i trequirements.

• Customer self‐service maintenance solutions are a new trend and place validation and good faith requirements squarely on therequirements squarely on the customer’s shoulders.

E l ti f• E‐commerce solutions for Web stores refine the process of collection and validation of certificates.

51

Documents

Presenting a live minute teleconference with …media.straffordpub.com/products/exemption-certificate...2012/03/29 · Presenting a live 110‐minute teleconference with interactive