What to Expect in an Exemption Certificate Audit
- Sales and Use Tax
- June 1, 2017 | Silvia Aguirre
It's probably far less prepared for such an event than you realize.
And all those documents that you spent so much time collecting and storing may not suffice should an auditor come knocking at your door.
Recent studies show that 48% of accounting professionals expect an auditor to find mistakes—namely missing exemption certificates—in the event of a sales and use tax audit.
We can fix it. To start, let's take a look at what’s going wrong.
Why are so few companies prepared for an exemption certificate audit?
The answer is simple:
Most have no idea what their liability would be.
Rather than proactively preparing for the possibility of an audit, many organizations wait to spring into action until after the letter arrives. This reactive approach means it costs the average company more than $114,000* to manage an audit.
If an auditor was to walk through your door today, would you know:
- How many exemption certificates you have?
- Which certificates will expire soon?
- How many certificates are missing information or need updating?
If you're shaking your head "no," don't panic. The answers to these questions and others like them elude many wholesalers and manufacturers. But you’re about to learn three proven industry secrets you can use to weather an exemption certificate audit with confidence.
#1. One missing document can lead to hefty fees
With the sampling technique used by exemption certificate auditors, just one missing document could result in thousands of dollars in fees and fines. For this reason, it’s crucial to know which certificates you don’t have before an auditor walks through the door. For each customer, ask yourself important questions such as:
- Do we have the right certificate?
- Did we collect the correct tax amount?
- Is the certificate thorough and accurate?
Any time the answer is “no,” it’s time to proactively prepare your records by getting a customer to update the incomplete or expired certificate.
Whether you automate the process or rely on papers and PDFs, the goal is to continually be working toward 100% compliance.
#2. Automation reduces risk by more than 90%
When companies automate their sales and use tax management with software, the percentage of accounting professionals who believe an auditor would find mistakes is just 3%*. (That’s a 94% decrease from the 48% mentioned above!)
It’s easy to understand why. The sheer number of metal filing cabinets it would take to store a fast-growing wholesaler’s certificates is mind boggling—especially when you factor in the complexities of online sales and nexus.
Yet one in four companies still don't have a system in place for tracking exemption certificates. Among those who do, nearly 50%* rely on hard copies.
Automation has been shown to remove the guesswork from certificate selections and collections. A solid certificate management system can even keep tabs on expiration dates and alert you when a customer’s certificate is missing important information.
#3. One size does not fit all
Like most sales tax issues, the steps to achieving exemption certificate compliance aren't always clear cut and can vary a lot from state to state. For example, some states have yearly renewal requirements while others do not.
The bigger your business, the more vigilant your auditor is likely to be. This means it’s extremely important to stay up-to-date on the latest tax laws as your company grows. This is especially critical if your company sells multiple products and services into many different states.
The more you know about the accuracy of your certificates, the easier they’ll be to pull for an auditor. And the more helpful you can be, the less time and money your company will have to expend during the audit itself.
A proactive process for collecting, validating and managing exemption certificates today can save your company from significant headaches tomorrow. While there are some other factors to consider, these are three of the most important.
Looking for more tips? We'd love to hear from you! When you request a demo, a certificate-savvy member of our team will walk you through the steps you should be taking to remain audit-ready.
* Unless otherwise noted, all numbers in this post are taken from the 2015 Wakefield Research Report: The Executive's Guide to Sales Tax Risk.