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How to manage sales tax exemption certificates

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Last Updated

How to manage sales tax exemption certificates

Anrok | Streamlined sales tax for SaaS

Going through a sales tax audit can be an intimidating process, in part because the auditors’ requests for documentation are specific, and the process can be demanding. Since sales taxes are so complex, it’s normal for you to worry whether you’ve done everything correctly and whether you have all the right evidence to prove it.

One of the first things an auditor will ask for is copies of your exemption certificates. If your sales tax operation is ship shape, you’ll have been collecting and saving these throughout the year. If you haven’t been, you may be in for unpleasant surprises, as your company could be liable for the uncollected tax if you do not have copies of valid exemption certificates.

Read on to learn what you need to know about exemption certificates so you can be ready the next time the auditor knocks on your door.

What types of exemptions are there?

A customer can be tax-exempt for multiple reasons. If a customer is a government entity, non-profit organization, credit union, school, or hospital, they may be exempt from paying sales tax. Each state has its own rules, so it’s important to know the regulations where you are located.

A 501(c)(3) designation may make an organization exempt from sales tax. Legitimate types of exemption certificates include resale certificates and direct pay permits. A multiple points of use (MPU) exemption is another common exemption for SaaS and digital goods, especially when the product is being used concurrently in multiple states.

How do I know if a certificate is valid?

It’s important to know what you’re looking for when you’re validating an exemption certificate. A 501(c)(3) designation does not necessarily mean that a customer is exempt from sales tax, and a letter from the IRS is not a valid form of exemption certificate.

Every state has its own exemption regulations and exemption certificates. Some states, such as Washington, DC, require a Certificate of Exemption be presented. In these states, those validating an exemption certificate need only verify that the name on the Certificate of Exemption matches the name of the customer.

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In other states like Texas, a sales and use tax exemption certificate is not valid unless the following has been completed on the certificate:

  • Name and address of purchaser
  • Name and address of seller
  • Description of items to be purchased
  • Signature of purchaser with date signed

For all states, it’s best practice to do a quick check for the following:

  • Customer name matches the name on the exemption certificate
  • All applicable information is filled out (both seller and purchaser names and addresses, reason for exemption, etc.)
  • Certificate is signed and dated
  • Expiration date has not passed

Is there one exemption certificate that is accepted by all jurisdictions?

Unfortunately, there is no global exemption certificate that is valid in every jurisdiction. However, 37 states accept the MTC Multi-jurisdictional Uniform Sales and Use Tax Exemption/Resales Certificate. However, each state has its own requirements for what makes that certificate valid.

What do I do with the exemption certificates I collect?

Arguably one of the most important parts of collecting and validating exemption certificates is storing those certificates in an organized way. It is important to be able to easily access them in case of an audit.

Exemption certificates should also be checked periodically to verify that they have not expired. Not all exemption certificates have an expiration date, but those that do need to be updated regularly in your system to ensure your files are up-to-date. Digital sales tax management engines can make this process easier. For instance, Anrok includes a function that allows you to upload certificates and track expiration dates automatically - request a demo here.

With a little digital help, you can verify and manage exemption certificates with ease. When the auditor comes knocking, you’ll be glad you did.

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