Most people don’t start a business with the intention of managing sales tax compliance on their own. It’s time-consuming and complicated, with potentially serious consequences for getting it wrong. In addition, sales tax rates, rules, and regulations are changing frequently, leading to even more questions.
To make things even more complicated, small businesses that are growing and expanding online and in multiple channels and jurisdictions now face other obligations, including collecting remote sales tax. They must also be able to manage exemption certificate collection and other documentation in real-time for tax-exempt ecommerce transactions.
With many businesses still using filing cabinets to hold physical certificates, errors are almost inevitable, and can lead to sales tax audit trouble. Fortunately, with the right tools, it’s possible to ensure full compliance with requirements for exemption certificates and tax-exempt transactions.
Here are a few things to remember about managing tax-exempt sales within your business.
Understanding sales tax audits
A sales tax audit is a business review by a state tax authority. The auditors request information about your sales history and compare it against what they have on record to make sure your business is compliant with tax rules and regulations. It’s essentially the state or regulatory agency verifying you’ve paid the sales tax you owe during a specific window of time.
The exact audit procedure varies for each state and jurisdiction, and the process can be tedious and time consuming — not to mention the potential monetary penalties that an audit may bring. Audits can take weeks or months, depending on how thorough the audit is, how quickly a jurisdiction receives the information they request, and how many rounds of review the schedules require.
The most important way to prepare for an audit is to maintain well-organized, easily accessible records. The more quickly, accurately, and completely you can provide information requested by tax authorities, the faster and smoother the process will be. Getting your documents in order before you receive an audit notice is key, and having complete records will help you justify tax decisions and can help you avoid penalties and fees.
In a recent survey, small businesses reported that it takes employees an average of 35 hours to oversee and respond to an audit, costing thousands of dollars in the process. The more you prepare before the audit begins, the more likely it’ll be over quickly.
Managing exemption certificates
An exemption certificate is a document that sellers collect in lieu of sales tax on exempt sales. Exemption certificates are typically collected for one of two sale types:
- The purchase is for resale, so tax will be assessed on the end user
- The buyer is a nontaxable entity, like a government agency, a religious organization, or a nonprofit
If you make one of these tax-exempt sales, you’ll need to collect a valid paper or digital certificate at the time of purchase. You’ll also have to store the certificate, so it’s accessible in the event of an audit. But managing paper-based exemptions can lead to significant problems. For example, if a customer can’t provide an exemption certificate, you’ll need to charge them the tax on the sale. If a business happens to lose a paper certificate and the transaction is under audit, it will require the remitting of the missing sales tax along with penalties and interest
In a digital-first world that’s increasingly moving to more ecommerce transactions, a growing business can’t afford to use a paper-based system and needs to upgrade to innovative technology applications to manage tax-exempt sales.
Technology applications for exemption management
With thousands of jurisdictions, laws changing, and more aggressive enforcement, automating compliance is the best way to ensure that businesses can scale efficiently and effectively while managing exempt sales.
Businesses can automate most aspects of the process with cloud-based programs that provide regularly updated rates, document collection and storage options, sales threshold tracking, license management, returns preparation and filing, and more. And an automated tax calculation program will be more accurate and efficient than managing compliance manually.
Using technology for exemption management, business leaders can easily track and maintain certificates and documents, get alerts when documents are expiring, and streamline certificate collection, effectively helping to speed up sales times and enable further growth.
Embracing automation for greater tax data visibility will also allow businesses to expand into new channels and markets while knowing that their tax compliance is taken care of. It will also help businesses scale with technology to help them further grow B2B ecommerce while also staying on top of compliance obligations.
While managing compliance documents can be a daunting task for a growing small business, failing to be compliance-conscious will further complicate and seriously harm your company. As you scale your businesses and move into different channels and locations, remember these concepts and how automation can help you scale for greater compliance, leading to improved growth and a better overall customer experience.
Silvia Aguirre is VP of certificate management at Avalara. Silvia co-founded Avalara CertCapture and prior to that was co-founder and principal of Tax Technology Services, LLC (TTS), where she was responsible for the operational efficiency of the organization and tax knowledge base.
Compliance stock image by Sean K/Shutterstock