What are tax exemption certificates?

As defined by the New York State Department of Taxation and Finance, sales tax exemption certificates enable a purchaser to make tax-free purchases that would normally be subject to sales tax. Once the purchaser has filled out the certificate and given it to the seller, the seller keeps the certificate and may sell property or services to the purchaser without charging sales tax.

For example, if an enterprise company sells its services to a tax-exempt educational organization, the company must collect the tax exemption certificate from the organization, validate that it’s completed correctly, and store it securely—while keeping track of different state requirements for how long a certificate must be stored. 

What are the different types of exemption certificates?

There are several different types of tax exemption certificates available based on business type and context. 

Resale certificates

Allow businesses to purchase goods tax-free when they intend to resell those items to end customers, with the sales tax ultimately collected at the final point of sale.

Manufacturing exemptions

Permit manufacturers to buy raw materials, components, software, or equipment used directly in the production process without paying sales tax, supporting industrial operations and reducing production costs.

Non-profit exemptions

Enable qualifying charitable, religious, educational, or other tax-exempt organizations to purchase goods and services without sales tax when used for their exempt purposes.

Government exemptions

Allow federal, state, and local government entities to make tax-free purchases for official government business and public services, though rules vary by state for different levels of government.

Additional industry-specific exemptions

Provide targeted sales tax relief for particular sectors like agriculture (farm equipment, livestock feed), healthcare (medical devices, prescription drugs), or utilities (equipment for power generation) based on each state's economic priorities.

Key components of valid certificates

Upon receiving an exemption certificate from a buyer, sellers are responsible for validating that the certificate has been completed correctly. Although certificate formats vary from state to state, some of the common elements that sellers in all states should look out for are:

• Certificate type selection, indicating whether certificate is for a single purchase or blanket certificate
• Exemption reason, which specifies the basis for exemption (resale, nonprofit status, government entity, etc.)
• Product/service description, specifying what is being purchased
• State-specific ID numbers (if required)
• Federal Employer Identification Number (if required)
• Expiration date

Why do tax exemption certificates matter for digital businesses?

Although tax exemptions primarily benefit the buyer, the onus is on the seller to make sure exemption certificates are properly completed and stored. Failing to manage certificates properly can lead to significant consequences. 

Legal consequences

If undergoing a tax audit, businesses will usually be asked to provide all relevant tax exemption certificates. Showing a properly completed certificate accepted in good faith protects the seller from liability for the uncollected sales tax. If you're audited and can't produce requested certificates, you may be responsible for the applicable taxes, as well as potential penalties. Those penalties can be as high as 10-25% of the uncollected tax amount, with the exact percentage varying by state and circumstances. 

Properly collecting tax exemption certificates can also prevent SaaS businesses from taxing exempt customers incorrectly. A good thing to avoid as rectifying sales tax down the road can frustrate customers and create operational burdens.

State-by-state exemption certificate information

Below is some general information on exemption certificates by state. This isn’t an exhaustive list of exemptions, always consult a sales tax advisor for the most accurate information on your businesses specific requirements.  

Alabama

• Certificate forms required: Alabama requires specific state forms (ST: EX-A1 for wholesalers/manufacturers, ST: EX-A1-SE for statutorily exempt entities) and does not accept out-of-state exemption certificates.
• Validity periods: Certificates are valid for one year from issuance and must be renewed annually before the end of the expiration month. Exemption certificate verification can be done through sellers' My Alabama Taxes (MAT) account.
• Industry-specific rules: Alabama provides separate exemption categories for different industries, with specific requirements for manufacturers, wholesalers, and statutorily exempt entities.
• Digital product considerations: Alabama generally does not require sales tax on SaaS as it's not explicitly listed as a taxable service, though this is based on unofficial guidance.
• Data center exemptions: Alabama provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Alaska

• No statewide sales tax note: Alaska has no statewide sales tax, making state-level exemption certificates unnecessary.
• Local jurisdiction requirements: Local municipalities that impose sales tax (including SaaS in some local jurisdictions) have their own exemption certificate requirements and acceptance standards. 
• Municipal exemption rules: Each local jurisdiction determines its own exemption categories and certificate validation procedures for local sales tax purposes.

Arizona

• Form requirements: Arizona requires specific state forms and does not accept multi-jurisdictional certificates for most exemptions.
• Resale certificate specifics: Arizona's resale certificates must clearly identify the nature of the buyer's business and the types of products being purchased for resale. Resale certificates can be verified by sellers by using the Arizona Department of Revenue's (AZDOR) online verification tool, which can be found at aztaxes.gov.
• Manufacturing exemptions: Arizona provides exemptions for machinery, equipment, and materials used directly in manufacturing, with specific documentation requirements.
• Technology sector considerations: Arizona generally taxes SaaS and requires technology companies to carefully document any claimed exemptions with proper certificates. 
• Transaction Privilege Tax considerations: Sales to the Federal Government may not be fully exempt from the TPT. Some sales to the Federal Government are taxed at half the regular TPT rate.
• Data center exemptions: Arizona provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Arkansas

• Certificate validation requirements: Arkansas requires sellers to validate exemption certificates in good faith and maintain proper documentation for audit purposes.
• Exemption categories: Arkansas provides exemptions for resale, manufacturing, agriculture, and certain nonprofit organizations with specific certificate requirements for each.
• Documentation standards: Arkansas mandates complete certificate information including tax ID numbers, signatures, and detailed descriptions of exempt use.

California

• Resale certificate requirements: California's resale certificates must specify the exact nature of the resale business and include valid seller's permits.
• SaaS exemption specifics: California generally exempts SaaS from sales tax when delivered electronically without tangible media, requiring no exemption certificate.
• Technology company considerations: California technology companies must distinguish between taxable bundled hardware and exempt software-only transactions.
• Streamlined certificate acceptance: California accepts certain multi-jurisdictional certificates but requires state-specific forms for most exemptions.
• Manufacturing exemptions: California has a partial exemption for manufacturing and R&D. This reduces the sales tax rate by about 4%. 

Colorado

• State and local requirements: Colorado exemption certificates must account for both state sales tax and varying local tax rates across different jurisdictions.
• Home-rule jurisdiction variations: Some Colorado municipalities have their own exemption rules that differ from state requirements, requiring separate certificates.
• Software exemption rules: Colorado generally exempts custom software but may tax prewritten software depending on delivery method and local jurisdiction rules.
• SaaS exemption rules: Colorado exempts SaaS at the state level, but is taxable in some local jurisdictions. 

Connecticut

• Digital goods exemption handling: Connecticut has specific rules for digital goods taxation that affect how exemption certificates are applied to software and digital services. B2B SaaS transactions, for example, are taxed at a reduced rate of 1%.
• Certificate acceptance standards: Connecticut requires certificates to be valid for three years from issuance and mandates specific state forms for most exemptions.
• Validation requirements: Connecticut sellers must exercise due diligence in validating certificate information and ensuring exemptions match the buyer's business type.

Delaware

• No sales tax overview: Delaware has no statewide sales tax, eliminating the need for traditional sales tax exemption certificates.
• B2B transaction considerations: Delaware businesses making B2B sales in other states must understand destination state exemption certificate requirements.

Florida

• Certificate requirements: Florida requires annual renewal of exemption certificates by December 31st and mandates specific state forms.
• Software and digital service exemptions: Florida generally exempts SaaS and digital services from sales tax, reducing the need for exemption certificates in technology transactions.
• Validation and record-keeping: Florida requires sellers to maintain exemption certificates for at least three years and validate buyer information in good faith. Some Florida exemption certificates can be verified on the Department of Revenue website. 

Georgia

• Exemption certificate standards: Georgia requires Form ST-5 certificates with complete information and mandates verification of buyer registration numbers through the state's online portal.
• Technology sector specifics: Georgia technology companies must carefully document exemptions for data processing services and software transactions.
• Data center exemptions: Georgia provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Hawaii

• GET exemption requirements: Hawaii's General Excise Tax system requires specific exemption documentation that differs from traditional sales tax certificates. Keep in mind that sales to the federal government are exempt. However, the seller may claim a deduction on their GET return for sales to the federal government. Be sure to check with your sales tax advisor for the most accurate guidance.
• Resale exemption specifics: Hawaii resale exemptions require detailed documentation of the buyer's wholesale or retail operations.
• Digital service considerations: Hawaii generally taxes SaaS and digital services under GET, requiring proper exemption certificates for any claimed exemptions.

Idaho

• Certificate validation requirements: Idaho requires sellers to validate exemption certificates in good faith and maintain proper records for audit purposes.
• Software exemption rules: Idaho generally exempts remotely accessed software (SaaS) from sales tax as it's not considered tangible personal property.
• Manufacturing exemptions: Idaho provides specific exemptions for manufacturing equipment and materials with detailed certificate documentation requirements.

Illinois

• Certificate acceptance standards: Illinois exemption certificates may be valid for five years for manufacturing but require updates every three years for resale certificates.
• Chicago-specific requirements: Illinois does not tax SaaS at the state level but Chicago imposes its own taxes on SaaS despite those state exemptions, requiring separate consideration of exemption certificates.
• Technology exemptions: Illinois generally exempts SaaS from state sales tax but technology companies must consider local jurisdiction variations.
• Data center exemptions: Illinois provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Indiana

• Exemption certificate requirements: Indiana requires annual renewal of exemption certificates and mandates specific state forms for different exemption types.
• Software and digital goods: Indiana generally exempts SaaS from sales tax but requires proper documentation for any software-related exemptions.
• Manufacturing exemptions: Indiana provides comprehensive manufacturing exemptions with specific certificate requirements for equipment, materials, and utilities.
• Data center exemptions: Indiana provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Iowa

• Certificate standards: Iowa requires proper completion of state-specific exemption certificates with validation of buyer information.
• Digital product exemptions: Iowa taxes SaaS but provides exemptions for commercial enterprises and manufacturing activities with proper certificate documentation.
• Validation requirements: Iowa sellers must exercise good faith in accepting certificates and maintain proper records for audit purposes.

Kansas

• Exemption certificate rules: Kansas exemption certificate requirements and expiration rules change periodically, requiring regular updates to compliance procedures.
• Software taxability considerations: Kansas generally exempts SaaS from sales tax, reducing exemption certificate requirements for software transactions.
• Documentation requirements: Kansas requires complete certificate information and mandates specific validation procedures for sellers.

Kentucky

• Certificate acceptance standards: Kentucky recommends updating exemption certificates every four years and requires different forms for different exemption types.
• SaaS and digital services considerations: SaaS and digital services have been generally taxable in Kentucky as of Jan 1, 2023. 
• Validation protocols: Kentucky requires sellers to validate certificate information in good faith and maintain audit-ready documentation.
• Data center exemptions: Kentucky provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Louisiana

• New SaaS taxation rules (2025): Louisiana has enacted new rules for taxing SaaS transactions that affect exemption certificate requirements for software companies.
• Exemption certificate requirements: Louisiana requires specific state forms and mandates proper validation of buyer information for all claimed exemptions.
• B2B exemption handling: Louisiana provides specific exemptions for B2B transactions with detailed certificate documentation requirements.

Maine

• Certificate standards: Maine requires state-specific exemption certificates and mandates proper validation of buyer qualification for claimed exemptions.
• Software exemption rules: Maine generally exempts SaaS from sales tax but requires proper documentation for any software-related exemption claims.
• Documentation requirements: Maine mandates complete certificate information and requires sellers to maintain audit-ready records.

Maryland

• Exemption certificate requirements: Maryland requires specific state forms and mandates annual renewal for certain types of exemption certificates.
• Digital goods considerations: Maryland has specific rules for digital goods that affect how exemption certificates apply to software and technology transactions.
• Validation standards: Maryland requires sellers to exercise due diligence in validating exemption certificates and maintaining proper documentation.

Massachusetts

• Certificate acceptance rules: Massachusetts exemption certificates are generally valid for five years but require renewal within 90 days of expiration notice.
• Documentation standards: Massachusetts requires complete certificate information and mandates specific validation procedures for sellers.

Michigan

• Exemption certificate requirements: Michigan requires state-specific exemption certificates and mandates proper validation of buyer eligibility.
• Digital product considerations: Michigan ultimately decided to exempt SaaS from sales tax, reducing exemption certificate complexity for software transactions.
• Validation protocols: Michigan requires sellers to validate certificates in good faith and maintain proper audit documentation.

Minnesota

• Certificate standards: Minnesota requires specific state forms and mandates proper validation of buyer information for all exemption claims.
• Software exemption rules: Minnesota generally exempts SaaS from sales tax but requires documentation for any software-related manufacturing exemptions.
• B2B transaction handling: Minnesota provides specific exemption procedures for B2B transactions with detailed certificate requirements.
• Data center exemptions: Minnesota provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Mississippi

• Certificate requirements: Mississippi requires state-specific exemption certificates and mandates proper validation of buyer qualification.
• Digital service considerations: As of July 1, 2023 SaaS became generally taxable in Mississippi, where the software is located on a server outside MS and accessed by a user within MS via the internet.
• Documentation standards: Mississippi requires complete certificate information and mandates proper record-keeping for audit purposes.
• Data center exemptions: Mississippi provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Missouri

• Exemption certificate rules: Missouri requires specific state forms and mandates proper validation procedures for all claimed exemptions.
• Software taxability: Missouri generally exempts SaaS from sales tax but requires proper documentation for any software-related exemption claims.
• Validation requirements: Missouri requires sellers to exercise good faith in accepting certificates and maintain audit-ready documentation.
• Data center exemptions: Missouri provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Montana

• No statewide sales tax: Montana has no statewide sales tax, eliminating the need for traditional sales tax exemption certificates.
• Local jurisdiction considerations: Some Montana localities may impose limited taxes requiring their own exemption procedures and documentation.

Nebraska

• Certificate standards: Nebraska requires state-specific exemption certificates and mandates proper validation of buyer information.
• Digital product exemptions: In Nebraska, SaaS is generally not subject to sales tax with minimal exemption certificate requirements for software transactions.
• Documentation requirements: Nebraska requires complete certificate information and mandates proper audit trail maintenance.

Nevada

• Exemption certificate rules: Nevada requires specific state forms and mandates proper validation of buyer eligibility for all claimed exemptions.
• Software considerations: Nevada generally exempts SaaS from sales tax but requires documentation for any software-related exemption claims.
• Validation standards: Nevada requires sellers to validate certificates in good faith and maintain proper documentation for audits.
• Data center exemptions: Nevada provides specific exemptions for data center equipment and operations with detailed certificate requirements.

New Hampshire

• No sales tax overview: New Hampshire has no statewide sales tax, eliminating the need for traditional sales tax exemption certificates.
• B2B considerations: New Hampshire businesses making sales in other states must understand destination state exemption certificate requirements.

New Jersey

• Certificate requirements: New Jersey requires state-specific exemption certificates and mandates proper validation of buyer information.
• Software and digital goods: New Jersey generally exempts SaaS from sales tax but requires documentation for software-related manufacturing exemptions.
• Documentation standards: New Jersey requires complete certificate information and mandates specific audit trail procedures.

New Mexico

• Exemption certificate rules: New Mexico requires specific state forms and mandates proper validation procedures for all exemption claims.
• Software taxation: SaaS in New Mexico is generally subject to the state's Gross receipts tax (GRT).
• Validation requirements: New Mexico requires sellers to exercise due diligence in validating certificates and maintaining proper records.

New York

• Certificate standards: New York requires state-specific forms, mandates completion within 90 days of purchase, and provides detailed validation requirements.
• Software and bundled services: New York taxes SaaS and bundled software services, requiring proper exemption certificates for any claimed exemptions.
• NYC-specific requirements: New York City may have additional local tax considerations that affect exemption certificate requirements for city transactions.
• Data center exemptions: New York provides specific exemptions for data center equipment and operations with detailed certificate requirements.

North Carolina

• Exemption certificate requirements: North Carolina requires state-specific certificates and mandates proper validation of buyer registration information.
• Digital product considerations: North Carolina generally exempts SaaS from sales tax but requires documentation for any software-related exemption claims.
• Documentation standards: North Carolina requires complete certificate information including either sales tax registration numbers or exemption numbers.
• Data center exemptions: North Carolina provides specific exemptions for data center equipment and operations with detailed certificate requirements.

North Dakota

• Certificate standards: North Dakota requires state-specific exemption certificates and mandates proper validation of buyer eligibility.
• Software exemptions: In North Dakota SaaS is generally not subject to sales tax with minimal exemption certificate requirements for software transactions.
• Validation protocols: North Dakota requires sellers to validate certificates in good faith and maintain proper audit documentation.

Ohio

• Exemption certificate rules: Ohio requires state-specific forms and mandates proper validation procedures for all claimed exemptions.
• Technology sector considerations: Ohio taxes certain data processing services, requiring proper exemption certificates for any technology-related exemption claims.
• Documentation requirements: Ohio requires complete certificate information and mandates specific record-keeping procedures for audit purposes.
• Data center exemptions: Ohio provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Oklahoma

• Certificate standards: Oklahoma requires state-specific exemption certificates and mandates proper validation of buyer information.
• Digital service taxation: Oklahoma has not specifically addressed SaaS taxability.
• Validation requirements: Oklahoma requires sellers to exercise good faith in accepting certificates and maintain proper audit trails.

Oregon

• No sales tax overview: Oregon has no statewide sales tax, eliminating the need for traditional sales tax exemption certificates.
• B2B transaction considerations: Oregon businesses making sales in other states must understand destination state exemption certificate requirements.

Pennsylvania

• Certificate requirements: Pennsylvania requires state-specific exemption certificates and mandates proper validation of buyer eligibility.
• Software and digital goods: SaaS is generally taxable in Pennsylvania. 
• Documentation standards: Pennsylvania requires complete certificate information and mandates specific audit trail procedures.

Rhode Island

• Exemption certificate rules: Rhode Island requires state-specific forms and mandates proper validation procedures for all exemption claims.
• Digital product considerations: SaaS is generally taxable in Rhode Island.
• Validation standards: Rhode Island requires sellers to validate certificates in good faith and maintain proper documentation for audits.

South Carolina

• Certificate standards: South Carolina requires state-specific exemption certificates and mandates proper validation of buyer information.
• Software exemptions: South Carolina generally taxes SaaS. However, some digital services and products that are generally associated with SaaS are not taxable. Sellers should consult with their tax advisors to determine whether their specific service and/or product offerings are taxable in the state.
• Documentation requirements: South Carolina requires complete certificate information and mandates proper record-keeping for audit purposes.

South Dakota

• Exemption certificate requirements: South Dakota requires state-specific certificates and mandates proper validation of buyer eligibility for all exemptions.
• Software taxation (all software taxed): South Dakota taxes all software including SaaS, making proper exemption certificates critical for any claimed software exemptions.
• Validation protocols: South Dakota requires sellers to validate certificates in good faith and maintain comprehensive audit documentation.

Tennessee

• Certificate standards: Tennessee requires state-specific exemption certificates and mandates proper validation of buyer information.
• Software taxation (all software taxed): Tennessee taxes all software including SaaS, requiring proper exemption certificates for any claimed software-related exemptions.
• Documentation requirements: Tennessee requires complete certificate information and mandates specific audit trail procedures.

Texas

• Exemption certificate rules: Texas uses the "should have known" standard requiring enhanced due diligence in validating exemption certificates.
• Data processing service considerations: In Texas, 20% of the total amount charged for data processing services is exempted from tax.
• Validation requirements: Texas requires sellers to validate certificates at or before transaction time and maintain comprehensive documentation proving good faith acceptance.
• Data center exemptions: Texas provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Utah

• Certificate standards: Utah requires state-specific exemption certificates and mandates proper validation of buyer eligibility.
• Digital product exemptions: Utah generally taxes SaaS but provides exemptions for certain qualifying transactions with proper certificate documentation.
• Documentation requirements: For certain certificates, Utah mandates one purchase within a specified amount of time to maintain certificate validity, be sure to check with your tax advisor for the latest requirements. 

Vermont

• New SaaS taxation rules (2024): Vermont has specific statutes addressing SaaS transactions and their exemption certificate requirements.
• Exemption certificate requirements: Vermont requires certificates to contain no false or misleading information and mandates good faith acceptance by sellers.
• Validation standards: Vermont requires sellers to be familiar with state tax law and validate that claimed exemptions are legitimate for the buyer's business.

Virginia

• Certificate standards: Virginia requires state-specific exemption certificates and mandates proper validation of buyer information for all exemptions.
• Software exemption maintenance: Virginia generally exempts SaaS from sales tax but requires ongoing maintenance of exemption certificate documentation.
• Documentation requirements: Virginia requires complete certificate information and mandates specific record-keeping procedures for audit purposes.
• Data center exemptions: Virginia provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Washington

• Exemption certificate rules: Washington requires state-specific forms and mandates proper validation procedures for all exemption claims.
• Software and digital services: Washington taxes SaaS as software, requiring proper exemption certificates for any claimed exemptions on software transactions.
• B&O tax considerations: Washington's Business & Occupation tax may have separate exemption requirements that differ from sales tax exemption certificates.
• Data center exemptions: Washington provides specific exemptions for data center equipment and operations with detailed certificate requirements.

West Virginia

• Certificate standards: West Virginia requires state-specific exemption certificates and mandates proper validation of buyer eligibility.
• Digital product considerations: West Virginia generally taxes SaaS, requiring proper exemption certificates for any claimed software-related exemptions.
• Validation requirements: West Virginia requires sellers to exercise good faith in accepting certificates and maintain proper audit documentation.

Wisconsin

• Exemption certificate requirements: Wisconsin requires state-specific certificates and mandates proper validation of buyer information for all exemptions.
• Software exemptions: In Wisconsin SaaS is generally not subject to sales tax with minimal exemption certificate requirements for software transactions.
• Documentation standards: Wisconsin requires complete certificate information and mandates specific audit trail procedures.

Wyoming

• Certificate standards: Wyoming requires state-specific exemption certificates and mandates proper validation of buyer eligibility.
• Limited exemption categories: Wyoming has fewer exemption categories than most states, simplifying exemption certificate requirements but limiting available exemptions.
• Validation requirements: Wyoming requires sellers to validate certificates in good faith and maintain proper documentation for audit purposes.
• Data center exemptions: Wyoming provides specific exemptions for data center equipment and operations with detailed certificate requirements.

Digital product and SaaS-specific exemption considerations

Tax exemptions apply to both B2B and B2C businesses, but there are differences in how each is required to prove exemptions. While B2B exemptions are based on how products will be used in business operations (manufacturing, resale, R&D, etc.), B2C exemptions are based on who the customer is (nonprofit, government, educational institution). This makes validating B2B exemptions more complex, as it requires understanding specific business use cases rather than just organizational status.

To support exemptions, B2B businesses must provide use-case specific details, business operation validation, ongoing use tracking, and industry-specific information in their exemption certificate. B2C businesses, on the other hand, are usually only required to show organizational status, entity identification, authorized purchaser verification, and scope of exemption. 

Software licensing vs. SaaS–is there a difference for tax exemptions?

When it comes to tax, the distinction between licensing software and selling it as a service is critical. While licensed, electronically downloaded software can be taxed as tangible personal property, SaaS is often classified as a service, which many states don’t tax. This makes subscription-based business models like SaaS much more favorable, as they can support exemptions more often than licensing business even when the underlying software is identical.

Furthermore, Cloud-based services are taxable in fewer states than SaaS. However, this creates complexity for exemption certificate management on the seller’s side, as a service might be taxable in some states (like Washington, which treats cloud-based services as taxable software) and exempt in others.

Bundled services and products

It’s becoming increasingly common for SaaS businesses to bundle products together in order to create more valuable offerings. Although it may help get deals over the line, product bundling can complicate sales tax exemptions because many states apply the "true object test" or require separate itemization to determine taxability. When non-taxable software is bundled with taxable services or hardware, the entire transaction may become taxable unless the components are stated and priced separately.

Bundled transactions often require more complex exemption certificate validation. Buyers must qualify for exemptions on each component of the bundle, and sellers must carefully document which specific elements of the bundle qualify for exemption to maintain audit protection.

It’s best practice for sellers to separate taxable and non-taxable components of a bundle by itemizing each component with separate line items on invoices, clearly identifying which elements are taxable (like hardware, implementation services, or support) and which aren’t (like SaaS subscriptions in exempt states), and ensuring that any claimed exemptions apply specifically to the qualifying components.

The separation must reflect the true standalone value of each component rather than arbitrary allocations, and businesses should maintain documentation showing how pricing was determined to demonstrate good faith compliance during audits. Improper bundling can cause the entire transaction to be treated as taxable even when some components would normally be exempt.

Managing tax exemption certificates at scale

Managing just a handful of exemption certificates can be complex. It’s critical for businesses scaling their customer count to implement systems and tools that enable them to manage certificates as efficiently as possible. 

Certificates should ideally be collected before or at the time of sale, though most states provide up to 90 days after the transaction to obtain proper documentation."

Sellers are allowed to collect certificates through:

• Electronic submission, via secure online portals or email (with proper digital signature validation)
• Physical paper certificates, collected in-person or via mail
• Integrated collection systems within billing platforms or customer onboarding workflows

Digital submission methods offer advantages like automated validation of required fields, instant verification of completeness, easier storage and retrieval for audits, and integration with tax automation systems, while physical certificates require manual review and are more prone to storage and organization challenges.

Validation and verification

Sellers must exercise "good faith" due diligence when reviewing exemption certificates. This means verifying that certificates are complete with all required fields filled out, ensuring the claimed exemption reasonably matches the buyer's business type and the transaction (e.g., a restaurant can't claim manufacturing exemptions for office supplies), and validating basic information like tax ID numbers through state databases where available.

Sellers should watch for red flags such as exemption claims that don't match the buyer's business type, purchases that can't reasonably be used for the claimed exempt purpose , incomplete or unsigned certificates, expired certificates, suspicious tax ID numbers that don't validate through state systems, and buyers who refuse to provide additional clarification when exemptions seem questionable.

Storage and organization

As a best practice, sellers should store exemption certificates for the period required by statute in the jurisdiction(s) the certificate applies. 

If storing exemptions digitally, you can simplify exemption management by implementing automated validation and organization systems. 

Organizing certificates with clear customer-to-transaction associations makes it easier for auditors to quickly match exempt sales to their supporting documentation. It’s also helpful to implement systematic categorization by exemption type, such as resale, manufacturing, nonprofit, etc.

Most digital solutions also offer features that enable you to track certificate expiration dates at scale and trigger alerts to expiring teams. 

Common errors to look out for related to certificate management are:

1. Accepting incomplete, invalid, or expired certificates
2. Collecting and organizing certificates inconsistently
3. Disorganized certificate storage

When to automate?

Automating certificate management is critical for protecting resources as your company scales. Typically it’s worth investing in automation platforms once you’re managing 100 or more exemption certificates across your customer base, or if you’re starting to manage exemptions across multiple states or business types. 

As you begin integrating automation, make sure to match automation sophistication to actual business needs. Over-automating low-complexity situations wastes resources, while under-automating high-volume or complex operations creates unacceptable compliance risks. In general, any automation solution should be able to support real-time validation, automated collection workflows, integration with your preferred systems, and compliance reporting.

Sellers should implement automation gradually by starting with highest-volume customers or single exemption types, then expand to additional customer segments and certificate categories. Phasing the rollout helps minimize disruption while allowing teams to learn the system and resolve issues before full deployment. As always, make sure to proactively tell customers about any system changes that might impact their processes.

Frequently asked questions 

Q: How long are tax exemption certificates valid? 

A: Validity periods vary by state, ranging from indefinite to annual renewals.

Q: Can I accept digital exemption certificates? 

A: Most states accept digital certificates, but some require specific formats.

Q: What happens if I don't collect exemption certificates? 

A: You may be liable for uncollected sales tax during audits, in addition to interest and penalty fees.

Q: Do exemption certificate requirements differ for SaaS companies? 

A: While the certificate requirements are generally the same, the exemption types and validation needs may differ based on your product classification.

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