Six exemption certificate management flashpoints

Digitize, store, and access the sales and use tax documents needed to improve compliance and streamline audit defense.

Managing the documentation of tax-exempt sales is vital to ensuring the accuracy of your sales and use tax reporting. Ineffective tax exemption certificate management can result in negative audit results and liability for the tax amounts that should have been collected. After a pandemic-related lull, tax audit activity is increasing as tax exemption certificates are subjected to renewed scrutiny by state auditors.  

A BDO article published about a year ago remains relevant in an era of rising audit risk concerning exemption certificates. The piece points out that “states are becoming stricter on both form and use, taking the position that where certificates are incomplete, invalid or misused, taxpayers may not avail themselves of the benefits the certificates offer.” The article identifies six areas that merit close attention from tax departments: 

  1. Sales to the government and agencies: While sales to the U.S. federal government are exempt, some states impose sales tax on government institutions that are not owned by the U.S. This includes federal credit unions and federal home loan banks. Sales to state governments and agencies are subject to sales tax in certain states.  
  2. Sales to non-profits: Don’t assume that these are automatically exempt; in fact, they are generally taxable unless used for charitable purposes or another exemption applies. Some jurisdictions require the institution to prove that it is a “purely public charity”. 
  3. Multi-entity purchasers: If one legal entity within an organisation makes a purchase, but another entity issues the exemption certificate, auditors may deem the certificate invalid. 
  4. Timely acceptance: Most states require exemption certificates to be issued at the time of sale or shortly thereafter. If they are not obtained within the prescribed period or (in some states) retroactively or during an audit, tax authorities may regard them as invalid. 
  5. Renewal period: In most states, certificates do not expire; however, some states require renewal within periods varying from one year to 10 years. 
  6. Multi-jurisdiction certificates: Intergovernmental organisations such as the Multistate Tax Commission (MTC) have created uniform exemption certificates. However, some states require use of their own forms and not all states allow the exemptions listed on the forms. Before accepting a multi-jurisdiction certificate, check state-specific rules about their limitations. 

The article offers additional recommendations to help companies meet their compliance requirements, including: 

  • Establishing a procedure to collect and process certificates at a central location 
  • Validating all certificates with a comprehensive review 
  • Monitoring expiring certificates 
  • Leveraging technology to automate requests, manage certificates and respond to audit requests. 

As tax audit activity increases, it's essential to have an efficient exemption certificate management system in place. An automated exemption certificate management solution can significantly improve your ability to electronically store, process and manage certificates. By leveraging technology, you can streamline certificate collection, validation and monitoring, ultimately reducing the risk of negative audit results and ensuring compliance with state regulations.

Blog Author

Michael J. Bernard, Chief Tax Officer – Transaction Tax at Vertex Inc. Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

Michael J. Bernard

Chief Tax Officer, Transaction Tax

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Michael Bernard is the Chief Tax Officer of Transaction Tax. In his role, he provides insight and thought leadership around tax department operations, U.S. indirect tax, tax risk management, and tax policy, as well as emerging tax trends. He is an executive-level tax attorney with a diverse portfolio of experience in corporate tax, administration, and finance, including a substantive knowledge of U.S. and international tax laws.

Prior to joining Vertex, Michael was in various tax leadership roles at Microsoft Corporation for 28 years, the most recent being Senior Director – Tax Counsel. Michael led teams in the following functional areas: direct and indirect tax controversy, sales and use, business license, property, tax IT, SOX, and telecommunications. He also co-led a corporate taxpayer advocacy group with the Washington Department of Revenue and was a Director on the Board of the Washington Research Council. Michael has also testified before administrative and lawmakers at both the federal and state level.

Michael earned both a J.D. and a Bachelor of Science in Business Administration from Creighton University. He is a part-time lecturer of Law in the LLM program at the University of Washington School of Law. Michael also served on the board of directors, executive committee, and chaired committees for The Tax Executives Institute (TEI) for nearly 25 years.

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