In theory, sales tax compliance should be a basic business task — a checkbox on a long list of must-dos. In reality, it’s tedious, time-consuming, and (often) mind-bogglingly complicated, especially when you factor in exempt sales.
Businesses need technology to stay on top of tax compliance. Automating sales tax compliance and exemption certificate management with software specifically designed to handle this work for you is a cost-effective solution; according to an Avalara/Potentiate survey, businesses with 20–499 employees estimate spending an average of $1,740 per month identifying state sales tax obligations and filing requirements. You can also save your team the time and hassle of manually inputting customer data and tracking down documents, not to mention automation can minimize the risk that comes along with human error.
Exemption certificate management can be complicated, but finding the right tax solution fit for your business doesn’t have to be. It all starts with having a complete picture of compliance.
Be clear on your tax obligations and register your business
Determine which sales and which customers qualify as exempt
Collect exemption certificates
Validate exemption certificates
Store, track, and manage documents and records
Stay compliant even when tax gets complicated with our guide on what exempt sellers should do throughout the sales process.
Stay compliant even when tax gets complicated with our guide on what exempt sellers should do throughout the sales process.
Why this step is important
Knowing where you need to collect and remit sales tax is the first step in staying compliant. You might not need to register everywhere, so determining where your business has economic nexus (the connection that establishes a business obligation to register, collect, and remit tax or, in the case of exemptions, file a $0 return) is key. First, you need to understand which business activities can establish a nexus connection, then determine where you might have tax obligations.
Where problems can occur
Many business activities can create a nexus obligation with a tax jurisdiction, including having physical locations, remote employees, affiliate relationships, or economic activity in that tax jurisdiction. Small shifts in your business could be the tipping point to nexus in more states. As changes happen, tax obligations and registration requirements can change too, often without you realizing it.
For businesses with exempt sales, economic nexus can be particularly confusing because it’s established by reaching a threshold based on an amount of sales and/or a certain number of transactions. It can be tricky to determine whether exempt sales should be included in those thresholds, and each state handles exempt sales differently.
You’ll find out quickly that the processes, forms, and requirements to register your business differ from state to state (and sometimes jurisdictions within a state), so there’s no simple way to manually register. And getting it wrong or operating without a business license can be a costly mistake.
What automation offers your business
Relying solely on people resources (internal or outsourced) to track and manage nexus simply isn’t efficient. You can’t expect (or afford) them to be experts on every state’s tax rules, regulations, and thresholds, or to constantly monitor when your company’s sales could trigger nexus in a new state. But you can arm them with technology that will do all that — and more. Plus, a cloud-based license management solution that can register you to collect and remit sales tax, obtain the licenses you need, and manage your license portfolio in one place.
Which solutions address this step
Additional services to consider
Why this step is important
After you determine where you have nexus and register to collect and remit sales tax in the appropriate jurisdictions, you need to assess which of your sales and/or customers qualify as exempt from sales tax. There are many reasons sales can be exempt from sales tax, including how or where the goods are used by the buyer. One of the most common reasons for a sales tax exemption is when items are intended for resale.
Where problems can occur
Rules are different in each state; some states don’t tax services and labor (and therefore don’t require any documentation), but some do. Plus, many states exempt nonprofits and government agencies from paying sales tax, but they’re still required to provide a valid exemption certificate.
As the number and types of products or services you sell grows, so does the likelihood you’ll have more tax-exempt sales and more complexity in maintaining compliance. New laws and regulations for remote sellers are increasing the number of customers you must monitor and manage when it comes to exempt sales. These new customers may create an obligation to collect exemption certificates in a jurisdiction where you previously weren’t required to. If that happens, you either need to start charging sales tax to customers or obtain a valid exemption certificate.
In addition, supply chain relationships can trigger a sales tax obligation even if no sales tax is collected. When this happens, you might not have to collect tax, but you need to have a valid resale or exemption certificate for your records. If you can’t produce valid documentation in the event of an audit, you could be liable for paying tax as well as interest and possibly penalties.
What automation offers your business
An automated solution can allow customers to upload their exemption certificates or submit their information to generate new ones. Plus Avalara Exemption Certificate Management validates certificates and applies exemptions automatically at the point of sale, so you won’t have to worry about chasing down documents from your customers or applying tax to an exempt sale on accident.
Which solutions address this step
Additional resources to consider